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Vodafone's Ono Deal Set to Get EU Nod

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Vodafone Group plc (VOD - Free Report) , the world’s second largest wireless carrier in terms of subscribers, is ready to get an unconditional approval from the European Union (EU) for its €7.2 billion ($9.79 billion) acquisition of Spanish cable operator, Ono. It will be Vodafone’s second Internet and TV asset acquisition in Europe in the past couple of years and represents the company’s efforts to strengthen its other segments in a bid to counter dwindling mobile revenues.

Vodafone's share price gained momentum on the news and closed 2.6% higher on Thursday trade on Nasdaq.

Reportedly, EU has no competition-related concern over the acquisition as the European watchdog has closely scrutinized consolidation deals within the telecom sector in the recent past. Deals involving two cable operators or two mobile operators within the same country have been under the scanner as EU remains rather particular about competition and reduced customer choices.  

EU has not even asked Vodafone to sweeten this deal, as it had demanded earlier for the carrier's Kabel Deutschland acquisition. Notably, Vodafone got the regulatory nod after it increased its deal value to €7.7 billion ($10.21 billion) from the initial bid of €7.2 billion ($9.6 billion).

Ono, which is majorly owned by private equity partners, has 1.9 million customers in Spain covering 70% of the population and offers broadband speeds of upto 200 MB/sec. With such high-speed offering, the deal will allow the British telecom behemoth to challenge Telefonica’s (TEF - Free Report) dominance in the Spanish market.

Synergies from the transaction will not only help Vodafone acquire customers, but will also enhance its Spanish market share of around 25% at present by an approximate 2%. The deal is expected to get the green signal on Jul 2, 2014.

Additionally, the telecom major in partnership with Orange (ORAN - Free Report) is preparing to launch fiber-to-the-home (FTTH) service in Spain in 2014. To strengthen its fiber optic network, both Vodafone and Orange had inked a deal with Telefonica in Jul 2013 to use the latter’s network to deploy faster broadband service for their customers. We believe the new FTTH network together with the Ono deal will curb Vodafone’s expansion cost along with reducing line renting from Telefonica.    

Vodafone currently boasts a healthy cash balance after it sold its 45% interest in Verizon Communications Inc. (VZ - Free Report) for $130 billion. However, despite its liquidity, decline in its top and bottom line given the impact of a challenging European economy coupled with rising regulatory and competitive pressures remains our concern. We thus remain bearish on Vodafone with a Zacks Rank #4 (Sell).

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