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Telecom behemoth Telefonica (TEF - Analyst Report) is trying to gain full control of Spanish pay-TV group Distribuidora de Television Digital, or DTS, by acquiring Mediasets. Reportedly, Telefonica has made a €295 million ($400 million) bid to take over 22% stake in DTS which is currently owned by Mediasets.

Earlier, on Jun 2, 2014, Telefonica reached an agreement with Promotora de Informaciones, S.A. (PRISA) to acquire the latter’s 56% stake in DTS for €750 million ($1.017 billion). The Mediasets deal will increase Telefonica’s stake in DTS to 78%. However, the deal is yet to receive the anti-trust approval and the green signal from PRISA’s sponsoring banks.    

Although Telefonica will become the owner of DTS, Italian media conglomerate Mediaset also stands to benefit from the transaction. Madrid-based Telefonica will pay €10 million ($13.56 million) to Mediaset if its deal with PRISA gets through. Mediaset could get an additional €20 million ($27.12 million) based on DTS’ rise in subscriber base over the next four years following the closure of the PRISA transaction.

Further, the Italian mass media company will receive an additional €30 million ($40.68 million) subject to acceptance of Telefonica’s offer and the surrender of its preferential right to acquire PRISA’s stake in DTS. This implies that Mediaset can receive up to $355 million depending upon the successful closure of the deal and the future performance of DTS.

Telefonica has been concentrating on Pay-TV to offset traditional access line loss. The carrier exited the first quarter of 2014 with total Pay-TV subscriber base of 3.6 million marking year-over-year growth of around 8%. Strong performance on the home ground and from its Brazilian subsidiary Telefonica Brasil (VIV - Analyst Report) facilitated the impressive results.

Telefonica has been successful in increasing its Pay-TV access market share in the main markets, where the company operates. We believe the DTS acquisition is part of its strategy to continue with the growth momentum.

Telefonica currently carries a Zacks Rank #3 (Hold). Better-ranked stocks worth considering within this sector are Kyocera Corp. (KYO - Snapshot Report) and Level 3 Communications Inc. (LVLT - Snapshot Report). Both the stocks currently carry a Zacks Rank #2 (Buy).

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