United Internet buys Deutsche Telekom's Strato for 600 million euros

By Maria Sheahan and Arno Schuetze

FRANKFURT (Reuters) - German internet service provider United Internet has agreed to buy web hosting business Strato from Deutsche Telekom for around 600 million euros ($629 million) in cash, as the sector continues to consolidate.

The acquisition will add more than 2 million customer contracts and almost 130 million euros in annual sales to United Internet's business.

"The acquisition of Strato will enable us to expand our leading market position in the European hosting and cloud application business and drive the consolidation of a market which is currently still strongly fragmented," United Internet Chief Executive Ralph Dommermuth said in a statement on Thursday.

The deal, to be done via a new holding United Internet recently formed with private equity group Warburg Pincus, values Strato at 12.4 times earnings before interest, tax, depreciation and amortisation (EBITDA).

That is roughly in line with the multiple that U.S. peer Godaddy paid for Host Europe Group (HEG) earlier this month.

Both United Internet and Deutsche Telekom had also been interested in HEG, but decided to pursue their own deal instead. Warburg will inject another roughly 50 million euros into the business applications holding as part of the Strato deal.

Former Deutsche Telekom head Rene Obermann, who joined Warburg in 2015 and led the investor's negotiations, will join the supervisory board of United Internet's webhosting unit 1&1.

United Internet is hoping to benefit from an expected push by Germany's swath of small- and medium sized companies to improve their digital offerings in the coming years by revamping their websites, adding features such as web shops, customer relationship apps and security tools.

Potential further acquisitions in the fragmented European webhosting market are also on the agenda, a person close to the matter said.

Some 566 million euros of the purchase price, to be paid in 2017, will be funded by a 350 million euro loan from United Internet and by equity capital to be provided by United Internet and Warburg Pincus, United Internet said.

The remaining 34 million euros will be due at a later point subject to certain performance goals, it said.

Shares in United Internet were up 5.2 percent by 1300 GMT, while Deutsche Telekom's were up 0.6 percent.

JP Morgan advised United Internet on the deal, while Warburg Pincus was advised by Rothschild.

($1 = 0.9539 euros)

(Reporting by Maria Sheahan and Arno Schuetze; Editing by Susan Thomas and Mark Potter)