Telefonica Deutschland announced late on Monday that it is to acquire E-Plus, the German mobile business of Dutch telco KPN, for around €8.1bn.
Once the two mobile units are merged, the company will have market share on a par with Vodafone and Deutsche Telekom, Germany's two largest telcos.
Under the deal, Telefonica will pay KPN €3.7bn in cash, and KPN will acquire a 24.9 percent stake in Telefonica Deutschland post-transaction. Telefonica Deutschland will also take a 7.3 percent stake in KPN under the agreement, at a further cost of €1.3bn.
"KPN will use the majority of the cash proceeds to increase its financial flexibility and intends to recommence dividend payment to shareholders for 2014," KPN said in a statement.
Both companies have been struggling with debt recently. But in the statement from Telefonica, the company noted that the cash payment will not be a problem: "No new debt will be raised at the level of Telefonica Deutschland, which is consistent with the company's target to maintain a low leverage level."
Instead, the cash payment will be financed through a rights issue which, when completed, will leave Telefonica Deutschland with 65 percent of the merged business and KPN with 17.6 percent.
With the acquisition, Telefonica's German unit O2 and E-Plus will account for about a third of the country's mobile market, allowing it to compete directly with Deutsche Telekom and Vodafone, each of which account for about another third. According to Telefonica Deutschland, the merged company will have 43 million mobile and broadband customers.
A similar deal between the telcos was attempted last year, after the Mexican mobile company America Movil announced it would attempt a takeover of KPN. But at the time, those talks fell through, because, according to KPN, "current adverse conditions in financial markets have meant that no agreement could be reached at this point in time, and talks have been terminated".
However, the Wall Street Journal at the time reported that Telefonica "failed to secure the necessary funding" for the deal, which was reported to be worth more than €10bn.
The current deal is expected to close in mid-2014 and is subject to the usual shareholder and regulatory approvals.