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Vodafone to Expand in Spain with Ono Buy

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Vodafone Group plc (VOD - Free Report) , the world’s second largest wireless carrier in terms of subscribers, has reached a deal to buy Madrid-based Ono for €7.2 billion (approximately $10 billion). If gets regulatory clearance, it will mark Vodafone’s second Internet and TV asset acquisition in Europe as the company looks to strengthen its other segments in a bid to counter dwindling mobile revenues.

Ono, which is majorly owned by private equity partners, has 1.9 million customers in Spain covering 70% of the population and can offer broadband speeds of upto 200 MB/sec. With such a high-speed offering, the deal will allow the telecom behemoth to challenge Telefonica’s (TEF - Free Report) dominance in the Spanish market. Vodafone expects to finance the transaction through internal cash reserves and undrawn bank facilities.

Synergies from the deal will not only help Vodafone acquire customers, but will also enhance its market share. Further, Vodafone will be able to generate around €1 billion ($1.39 billion) in revenues by cross selling its product to Ono customers.

Notably, Vodafone acquired a 76.48% stake in Kabel Deutschland for €7.7 billion (around $10.21 billion) in Sep 2013, and settled on a domination agreement requiring payment of €84.53 per share to the remaining shareholders. The company also struck a wholesale agreement with Deutsche Telecom for offering high-speed fixed-line broadband and Internet Protocol-based TV services across Germany.

Moreover, in the same month, Vodafone reached an agreement with Verizon to sell its 45% interest in Verizon Wireless Communications Inc. (VZ - Free Report) for $130 billion. The company closed the deal on Feb 21, 2014. In Sep 2013, the company also announced plans to buy Verizon's stake (of around 23.14%) in Vodafone Italia, for $3.5 billion.

In Spain, the company is gaining from its tie-up with Orange (ORAN - Free Report) and has also entered into a vertical access agreement with Telefonica for accessing the fiber optic network. The Ono deal will save Vodafone’s expansion cost along with reducing line renting from Telefonica.

However, we remain concerned about the heavy multiple that the British incumbent is paying to acquire Ono. Further, with rival Orange looking to snap up Spain’s fourth biggest telecom operator Jazztel, the nation's telecom market is likely to become more competitive going forward.

Vodafone currently carries a Zacks Rank #5 (Strong Sell).

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