Telefonica mulls merger to ward off takeover threat

The board of Spanish telco Telefonica is to meet today to discuss the possible merger with Dutch telco KPN.

The two companies confirmed this week they have been holding talks over a full or partial merger - a full merger would value the two companies at around E160bn (£91bn).

Analysts think the most likely option will be a tie-up of the companies' respective mobile units. Because a full merger between KPN and Telefonica would face a number of obstacles - in particular from the national governments which still own a significant share of the respective companies.

The talks have become more intense in the face of potential hostile takeover bids from other European and US operators such as NTT DoCoMo, Deutsche Telekom and BT.

However, John Moroney, principle consultant at Ovum, argued that only a full merger would ward off hostile bids. He said: "The threat of a hostile takeover by another player, either media or telecoms, is strong. A full merger would put them [KPN and Telefonica] in a league that excludes them from takeover, but a partial takeover, or joint venture of the mobile units, would just make it more attractive."

A mobile tie-up would put KPN and Telefonica in a stronger position if they were to go up against other potential bidders such as MCI Worldcom and France Telecom for UK mobile operator Orange - which has won the UK auction for a UMTS licence.

But Moroney warned against the option. "There have been proven problems in the past with partial alliances - if they are serious about growing the companies globally they should go for the full merger."

A spokesman for KPN said it hadn't ruled out any options. "We are still in talks that could lead to full co-operation or partial co-operation with Telefonica - both are still possible," he said.