Telefonica has purchased KPN's German mobile network E-Plus in a deal worth €8.1 billion (£6.95 billion). E-Plus is currently the third biggest operator in Germany, whilst Telefonica's O2 is the fourth.
The acquisition will result in a full merger of the two company's German operations with Telefonica paying KPN €5 billion (£4.29 billion) in cash and a 17.6 per cent stake in the resulting company. Telefonica will hold a 65 per cent share in the new network whilst the remaining shares will be publicly floated.
The move means that the combined network, expected to use the O2 brand, will become the largest mobile operator in Germany with 43 million customers. T-Mobile and Vodafone are currently the first and second biggest networks in the country with 37 million and 32.4 million subscribers respectively.
It also means Telefonica will become Europe's second largest mobile network operator by customers and revenue.
The companies have said that the transaction will be carried out over two stages. Initially Telefonica Deutschland will pay €3.7 billion (£3.18 billion) with KPN receiving 24.9 per cent of the new business. In the second phase, Telefonica S.A., the company's Spanish division will buy 7.3 per cent of KPN's shares in the new network for €1.3 billion (£1.12 billion).
The merger is subject to approval by financial regulators and such a move is likely to be referred to the European Commission. However, given that Neelie Kroes, the EU commissioner in charge of digital agenda, is pushing to create a single telecoms market in Europe, the deal may not come under a great amount of scrutiny.
KPN has said the company now plans to focus on its key markets of The Netherlands, where it is the largest operator with a 45 per cent market share, and Belgium where it wishes to expand on a current 21 per cent share of the mobile market.
Eelco Blok, CEO of KPN said: "The opportunity to unlock significant value in Germany by selling E-Plus is clear and compelling. The significant premium embedded in the sale price recognizes the substantial operational synergies. The combination of E-Plus and Telefónica Deutschland will establish a mobile operator with attractive synergy and growth potential in Europe's largest economy."
The transaction is expected to be completed in early 2014.