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Summary

Mobile virtual network operator (MVNO) Drillisch and 1&1 Telecommunication SE, part of the United Internet Group, have announced consolidation plans and entered a business combination agreement. Drillisch brands have been driving price competition across the discounter mobile market in Germany. 1&1 brings fixed services to the table via 1&1 Versatel. Together, the service providers create a strong fourth player. The Drillisch and Telefonica MVNO agreement remains unchanged, giving the new duo a strong position for network capacity expansion and launch of fixed–mobile convergence.

MVNO consolidation will create Germany's next FMC player

With a combined subscriber base of 8 million, the two operators create a strong player in Germany, where the number of mobile network operators (MNOs) was reduced from four to three following the O2 and E-Plus merger in 2014. Together with 1&1, which offers fixed broadband services along with its mobile virtual offers, the two service providers have a strong multiplay proposition that they should leverage. This M&A offers a great opportunity for Drillisch and 1&1 to offer fixed and mobile converged services, due to their strong combined resources:

  • Combined 2016 revenue of €3.2bn

  • 2017 expected EBITDA of €630m–€640m

  • More than 12 million contracts, which include fixed and mobile

  • Agreement of access to Telefonica's 5G and other next-generation networks

  • Second largest fiber network (FTTC) in Germany with agreements that already deploy vectoring together with Deutsche Telekom

Drillisch brands such as Yourfone and smartmobil.de combined reached a subscriber growth rate of 28% YoY in FY16. 1&1's mobile subscriber base is the second largest MVNO subscriber share in Germany, competing neck and neck with Freenet. Their combined subscriber reach as well as network capacity gets the duo closer to an MNO eye level. The merged parties have already managed to win a first negotiation deal with their largest network supplier, Telefonica, whereby the latter agreed to waive rights to certain clauses undisclosed by the operators that would have come into effect as a result of change of control on the Drillisch side. This will result in a strong position for the merged parties. By the end of FY17, the operators will have followed a three-step consolidation process that will put 1&1 under 100% Drillisch control and Drillisch under United Internet control with a minimum 72.7% stakeholder share.

As part of a larger European wave of consolidation in the mobile market, Germany also saw an MNO merger in 2014 between O2 and E-Plus. Such mergers have often resulted in competition regulation, and in the German market it resulted in an imposition of up to 30% of the then newly joint network capacities to be accessible to MVNOs. Drillisch was a clear winner in these regulator-imposed remedies and has the right to use 20% of O2 capacity. In addition to that, 1&1 has access to both the O2 and Vodafone networks. The latter does not provide its 4G network to MVNOs. Pricing champion Drillisch has so far been a great driver of price decreases in the German mobile market. The operator does not plan any reversed strategy; however, further decreases are also not expected. As a result, Ovum believes the market can expect Drillisch and 1&1 to have a level playing field in becoming a fourth player in Germany, following the completion of this merger. On the flipside, Ovum does not see the merged companies to be entering any upcoming frequency auctions in the short to midterm, particularly in light of the strong network access provided by Telefonica.

Appendix

Author

Armita Satari, Analyst, Europe

armita.satasri@ovum.com

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