United Internet buys Drillisch to stir up German telecoms market

* Deal to create business with 3.2 bln euros annual sales

* Total (LSE: 524773.L - news) deal value of more than 8 bln euros

* New (KOSDAQ: 160550.KQ - news) player to fuel competition at low-end of market

* United Internet (IOB: 0GE4.IL - news) up 11.6 pct, Drillisch (IOB: 0E6Y.IL - news) up 8.7 pct (Adds analyst comment, shares)

By Georgina Prodhan and Harro Ten Wolde

FRANKFURT, May 12 (Reuters) - German internet service provider United Internet plans to buy a majority stake in mobile operator Drillisch in a staggered stock and cash deal which will boost competition at the low end of the crowded German telecoms market.

United Internet plans to combine Drillisch and its own 1&1 consumer fixed-line and mobile business within the group, maintaining Drillisch's independent listing and "attractive" dividend policy, the companies said on Friday.

The proposed transaction values the 1&1 Telecommunication retail business at 5.85 billion euros ($6.36 billion) and will create a business with annual sales of more than 3.2 billion euros and more than 12 million customers, the companies said.

That would put it in fourth place behind Deutsche Telekom (IOB: 0MPH.IL - news) , Vodafone and Telefonica Deutschland , all of whom have their own mobile networks. Drillisch (Swiss: DRI.SW - news) has extensive access to Telefonica (LSE: 826858.L - news) 's mobile network.

The total transaction has a value of more than 8 billion euros, excluding debt, making it the biggest M&A deal announced in Germany so far this year.

Incuding synergies a company worth more than 10 billion will be created, a person familiar with deal told Reuters.

"The combination with 1&1 Telecommunication is a tremendous opportunity for Drillisch and our shareholders and is a leap for our company into a completely new dimension," Drillisch Chief Executive Vlasios Choulidis said.

"In terms of sales, Drillisch AG will be about five times as large as it is today."

Drillisch said that Choulidis would step down from operational management and become chairman of Drillisch's supervisory board if the transaction goes through as planned.

The combined company would be led by Drillisch finance chief Andre Driesen, as well as 1&1 Telecommunication CEO Martin Witt and United Internet Chief Executive Ralph Dommermuth.

STEP BY STEP

The companies aim to execute the deal through two capital increases by Drillisch to buy a stake in and then acquire all of 1&1, consequently lifting United (Shenzhen: 000925.SZ - news) 's stake in Drillisch in exchange.

Drillisch will initially sell 9 million new shares to buy 7.75 percent of 1&1 Telecommunication, which will take United Internet's stake in Drillisch to a little more than 30 percent from 20 percent and trigger a full takeover offer.

That offer will be at 50 euros per share, which the companies said represented a premium of 8.2 percent over Drillisch's three-month volume-weighted average share price. The offer is expected to run from the end of May to the end of June.

Drillisch would then buy the rest of 1&1 Telecommunication for 108 million new Drillisch shares, in exchange for which United's stake in Drillisch would rise to 72.7 percent.

Shares (Berlin: DI6.BE - news) in Drillisch were up 8.7 percent in early trade at 52.77 euros and above United Internet's offer price.

Shares in United Internet rose 11.6 percent to the top of the German TECDAX. Telefonica Deutschland shares were up 5.4 percent.

"This transaction represents the logical next step in the consolidation of retail branding and commercial capacity in the crowded German mobile market," said Dhananjay Mirchandani an analyst at Bernstein.

In Germany, there were around 122 million activated mobile SIM cards at the end of last year, in a population of about 80 million people, according to the Federal Networks Agency.

Bernstein's Mirchandani added that competition on the German market would increase in the near term, threatening Telefonica Deutschland and Vodafone's price sensitive products.

"Deutsche Telekom is best positioned to weather the heightened near-term competitive intensity due to the strength of its second brand Congstar," he said.

Deutsche Telekom shares were 1.3 percent higher on Friday at the top of Germany's blue chip index.

The two companies said they envisaged annual savings of 150 million euros from 2020, rising to 250 million euros by 2025, and costs of 50 million euros for the transaction.

Bank of America Merrill Lynch advised Drillisch on the deal and JP Morgan was United Internet's adviser.

($1 = 0.9200 euros) (Additional reporting by Alexander Huebner and Arno Schuetze; Editing by David Goodman/Keith Weir)