* KPN sells unit for 5 bln euros cash, 17.6 pct of merged co
* Deal would combine third, fourth-place players in Germany
* Telefonica says deal won't affect net debt to EBITDA ratio
* To finance deal via cap hike at German unit plus debt
* Telefonica Deutschland plans 3.7 billion eur share sale
By Robert-Jan Bartunek and Clare Kane
BRUSSELS/MADRID, July 23 (Reuters) - Dutch telecoms group KPN will sell its German unit to Telefonica Deutschland for some 8.1 billion euros ($11 billion) in cash and shares, in a long-awaited deal that will test regulators' views in Europe's largest mobile market.
If KPN's disposal of E-Plus is finalised, the new company would hold a share of about 30 percent of Germany's mobile service revenue and would be better armed to take on Deutsche Telekom and Vodafone, with 35 percent each.
KPN said the deal, in which it will receive 5 billion euros cash and a 17.6 percent stake in the newly merged company - which KPN valued at some 3.1 billion euros - would generate cost savings of between 5.0 and 5.5 billion euros.
For Telefonica, which has been selling assets for the past two years to cut its massive debts, the deal is a bold bet on Germany, a market where despite recent intensified competition profit margins remain high compared with Britain and Spain.
The Spanish group said it would need to raise 4.14 billion euros to finance the deal. About 3.7 billion euros will come from a rights issue at Telefonica Deutschland, to which Telefonica will subscribe for 2.84 billion.
Telefonica said it expected the deal would not affect its key net debt to core earnings (EBITDA) ratio. Roughly 50 to 65 percent of the amount it has to raise will come from hybrid debt, 20 to 30 percent from a mandatory convertible bond and the rest from incremental debt.
Rating agencies have not yet given their view on the deal.
The two companies had flagged the deal late on Monday and sources earlier confirmed to Reuters the structure and price of the combination.
"As we have said for many years, we will sell any asset for the right price," KPN Chief Executive Eelco Blok said. "For a long time people have predicted this combination would happen and we're very, very pleased that we have reached an agreement."
The deal is the latest in a spate of acquisitions in the global telecom sector, which is reshaping the competitive dynamics of an industry struggling in Europe but flourishing in the United States and Asia where prices and profits are higher.
Vivendi also on Tuesday agreed to sell a controlling stake in Maroc Telecom to Gulf operator Etisalat . Japan's Softbank, Vodafone and cable group Liberty Global have all done deals to bolster their operations in recent months, while Asia's Hutchison Whampoa is seeking to consolidate the Ireland market.
Because of its size and cross-border implications, the European Commission's antitrust watchdog will closely evaluate the deal's impact on consumers and network quality in Germany.
In recent deals such as in Austria where operators sought to take markets from four to three players, regulators have demanded concessions such as spectrum divestments and pledges to offer competitive rental terms to rivals.
"In an environment where in-market consolidation has been put under intense regulatory scrutiny ... we believe such a deal would face significant hurdles in principle, even before discussing potential concessions," wrote Jefferies analyst Ulrich Rathe.
It remains to be seen why America Movil, which has a stake of about 30 percent in KPN, decided to back the deal to sell off the German unit, the Dutch operator's crown jewel, to its arch-rival. America Movil and Telefonica compete head to head across Latin America and their bosses Carlos Slim and Cesar Alierta are old foes.
One person involved in the talks said Slim and KPN saw it as a good time to sell given E-Plus's weak position in the market and with expensive spectrum auctions looming.
"Slim and KPN know they will never get as good a price for this asset as they will get right now," the person said. "The competitive environment in Germany is getting worse ... E-Plus is in an unsustainable position in Germany: too small, too few spectrum holdings, and inability to invest to keep up with the other players."
On a conference call, KPN boss Blok refused to be drawn into explaining America Movil's position, merely adding that the Mexican group has two members on the supervisory board, which as a whole voted for the deal. America Movil has yet to make any public statement.
KPN said it would use the majority of the cash proceeds to improve its balance sheet and would restart paying a dividend for 2014.
KPN said JP Morgan, Goldman Sachs, ABN AMRO and law firm Allen & Overy were its advisors on the deal. Telefonica's advisers included HSBC and Morgan Stanley, according to people familiar with the matter. UBS was joint advisor to Telefonica Deutschland alongside Bank of America Merrill Lynch.
Telefonica said its target to cut debt to less than 47 billion euros by year-end from 51.3 billion at the end of 2012 would be unaffected by the deal.
KPN has some 24 million customers in Germany and saw its core profit decline by 30 percent in the country, adjusted for one-off items, in the second quarter as it lowered its prices to attract new customers.
At a group level, core profit, adjusted for one-off items, fell 11 percent in the quarter to 1.08 billion euros, above the 991 million expected in a Reuters poll of 10 analysts.