UPDATE 2-KPN raises 5 bln euros cash in E-Plus sale to Telefonica Deutschland
* KPN sells unit for 5 bln euros in cash
* Also to get 17.6 pct stake in merged co
* Including stake implies total deal value of 8.1 bln eur
* Q2 core pft after one-offs 1.1 bln eur vs f'cast 991 mln
* Telefonica Deutschland plans 3.7 billion eur share sale
BRUSSELS/MADRID, July 23 (Reuters) - Dutch telecoms group KPN will sell its German unit to competitor Telefonica Deutschland for 5 billion euros ($6.6 billion) in cash, helping create a stronger competitor to bigger players Deutsche Telekom and Vodafone.
KPN said the deal, which would also give it a 17.6 percent stake in the merged company, was subject to regulatory and shareholder approval and would generate synergy benefits of between 5.0 billion euros and 5.5 billion.
The two companies had flagged the deal late on Monday, saying they were in talks to combine their German mobile businesses.
Telefonica said once the deal was approved, it would have 38 percent of Germany's mobile users and 31.8 percent of the market in terms of earnings.
America Movil, which has a stake of about 30 percent in KPN, competes head-to-head with Telefonica which is present across Latin America.
KPN's German unit, E-Plus, and Telefonica's O2 Deutschland vie for third place in Europe's biggest mobile market and both are facing tough competition from Vodafone and Deutsche Telecom.
KPN said it would use the majority of the cash proceeds to improve its balance sheet and would restart paying a dividend for 2014.
Including the 17.6 percent stake in Telefonica Deutschland, the total transaction valuation for E-Plus is 8.1 billion euros, KPN said.
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.
The Spanish company said Telefonica Deutschland unit would seek shareholder approval for a share issue to raise cash for the deal. The company said it would subscribe to its 2.84 billion euro share of the 3.7 billion euro capital increase.
Analysts at brokerage Kepler Cheuvreux said Telefonica's cash payment would slightly raise the company's debt to EBITDA ratio, by around 0.15 percentage points, though they said it was positive that Telefonica was using shares as currency in the deal as this was one of the main purposes of listing the entity.
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 second quarter to 1.08 billion euros, above the 991 million expected in a Reuters poll of 10 analysts.
The group said its net debt to core profit ratio at the end of the second quarter stood at 2.2 times, a marked reduction from the 2.8 times at the end of the first quarter due to its 3 billion euros rights issue.