FRANKFURT/BERLIN (Reuters) – Spain’s Telefonica TEF.MC is in the final stages of negotiating a roughly 5 billion euros ($5.9 billion) deal to build a fibre-optic network in Germany, people close to the matter said.

FILE PHOTO: A general view shows the Telefonica headquarters in Madrid, Spain, June 12, 2018. REUTERS/Juan Medina/File Photo

The company’s Telefonica Infrastructure unit is planning to sign a deal with banks and an infrastructure investor by the end of the month, the people said.

Banks would lend two-thirds of the money needed to build the fibre-to-the-home (FTTH) network. The rest would be equity, including from an investor now holding exclusive talks with the company, the people said, speaking on condition of anonymity as the discussions are ongoing.

The roughly 5 billion euro price tag would be a total investment number, with money to flow to the fibre venture in stages once project milestones are reached, one of the people added.

Lazard is organising the transaction, the people said.

Telefonica and Lazard declined to comment. Telefonica is due to report third quarter results on Oct. 29.

Chief Operating Officer Angel Vila announced in July that Telefonica would develop fibre networks in under-served areas of Germany that would be built by the new infrastructure unit.

The Spanish group’s local arm, Telefonica Deutschland O2Dn.DE, is likely to take a passive equity stake and become an anchor customer, sources familiar with the plan have said.

The strategy, if realised, would mark a sharp reversal from the mobile-first plan pursued by Telefonica in Germany, where its local unit operates under the O2 brand and relies on renting capacity to serve broadband customers.

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It would also pile fresh liabilities on top of a 37 billion euro debt pile that Telefonica has laboured in recent years to reduce. Its shares have fallen by 47% so far this year, putting an equity value of 17 billion euros on the business.

LATE TO THE PARTY

Telefonica Deutschland just this week extended by 10 years an agreement to rent broadband capacity from market leader Deutsche Telekom DTEGn.DE that, industry sources say, offers highly affordable ‘bitstream’ rates.

Word of the fibre project caused consternation on the German market, where Telefonica Deutschland used to be a top broadband player before first renting access to Deutsche Telekom’s broadband network in 2013. Telefonica Deutschland has since run down its fixed-line network.

Telefonica Deutschland now ranks fourth behind Deutsche Telekom, Vodafone VOD.L and 1&1 Drillisch DRIG.DE with 2.2 million retail broadband customers – a market share of 6.2%, according to the latest study by the VATM industry association, which groups alternative telecoms providers.

Launching a debt-backed venture could be risky, since other fibre-only players have a head start. Swedish infrastructure group EQT EQTAB.ST has, for example, bought and merged fibre pioneers Inexio and Deutsche Glasfaser.

“Maybe I lack the imagination, but I struggle to see a good starting point for Telefonica to build a FTTH network in Germany,” said one industry source, who requested anonymity due to the sensitivity of the matter.

Moreover, even though there are 5 million available FTTP connections in Germany, only 37% are active. That’s symptomatic of widespread reluctance to pay more for gigabit speeds when most households are happy with the bandwidth they already have, said a source at an industry competitor.

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Earlier this year, Telefonica Deutschland sold 10,100 towers and rooftop sites for $1.5 billion to Telxius, an infrastructure unit carved out by the Spanish group, which brought in KKR KKR.N and Zara owner Amancio Ortega as backers.

Citi analyst Georgios Ierodiaconou said Telefonica Deutschland was likely to plough some proceeds from that sale into the German fibre venture, which management has signalled would run alongside its existing capacity rental arrangements.

($1 = 0.8516 euros)

Additional reporting by Douglas Busvine and Isla Binnie; Editing by Mark Potter

Via Reuters Finance