A man walks past Telefonica's building in central Madrid, March, 2013. Reuters / Juan Medina

Telefonica S.A. (ADR) (NYSE:TEF) agreed on Tuesday to buy Germany's third-largest mobile phone service operator, E-Plus, from Dutch telecommunications company Royal KPN, for a deal valued at 8.1 billion euros ($10.7 billion).

Madrid-based Telefónica said in a statement that it will combine its 19.3 million O2 customers with E-Plus' 23.4 million customers. E-Plus recorded 3.4 billion euros in revenue last year.

Some of the details of the agreement mean that KPN will sell E-Plus to Telefónica for 3.7 billion euros in cash, and KPN will receive a 24.9 percent stake in Telefónica Deutschland.

The deal, which is pending approval from European antitrust officials and shareholders, will create Germany's largest mobile-phone operator and signals accelerating consolidation in Europe's phone sector.

T-Mobile Germany and Vodafone Germany control more than half of Europe's telecommunications market share.