Vodafone buying Tele2 in Italy and Spain for an all cash deal

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Vodafone To Buy Tele2 Operations In Italy, Spain For GBP537 Million

Mobile phone giant Vodafone Group, Saturday beat off rivals to acquire the Italian and Spanish assets of Tele2 for GBP537 million (US$1.1 billion).

The world's largest mobile phone operator by revenue said it will pay cash for the assets in a debt-free deal.

Sweden's Tele2 offers fixed-line and internet services to more than 2.6 million clients in Italy. In Spain, it provides broadband and fixed-line telephone services. Over the past year it has been divesting parts of its European fixed-line business to focus on selling mobile phone services.

Vodafone Chief Executive Arun Sarin said the deal is not expected to materially impact on the Group's ongoing capital intensity ratio in Europe. It is also expected to be broadly neutral to adjusted earnings-per-share in the first full year after acquisition, excluding the impact of acquired intangible asset amortization.

"This acquisition...will generate substantial time to market benefits in Italy and Spain, where low broadband penetration and the market structure make ownership of fixed broadband assets attractive," Sarin said in a statement."We have now established a clear route to delivering fixed broadband services in each of our major European markets," he said.

The acquisition gives Vodafone greater access to two fixed-line European markets where broadband penetration is low, making it commercially viable for them to buy assets. In Italy, around 44% of households are expected to have broadband services by the end of 2007. Spain is expected to have broadband in 57% of households by year end. Both countries have grown by over 30% in the past two years.

The deal will bring Vodafone 2.6 million customers, including 400,000 broadband users in Italy and half a million Spanish customers, around half of which have broadband.

Italian internet operators Fastweb, Tiscali and telecommunications company Wind were also believed to be interested in Tele2's Italian assets, but less so in its Spanish operations.

Tele2 has already sold its Czech Republic operations to Ceske Radiokomunikace and its French broadband business to SFR - in which Vodafone has a stake - for $450 million. It has also sold off assets in Belgium and Hungary.

A buyout of Tele2's Spanish and Italian assets makes sense as Vodafone doesn't own a broadband network in either country. In June, Vodafone missed out on buying Deutsche Telekom's Ya.com internet operations in Spain, which were sold instead to France Telecom for EUR320 million.

In May last year, Vodafone Chief Executive Arun Sarin tried to stave off critics concerned that the mobile operator wasn't doing enough to compete with the aggressive pricing in the European market by launching his "Mobile Plus" strategy.

As part of this, Sarin said he would focus part of the company on earning an additional 10% of group revenue, or about GBP3 billion, from new services, including broadband, mobile advertising and fixed-to-mobile convergence by 2010.

However, despite setting these targets, Vodafone has until now taken an "asset-light" approach to building a European broadband network, rather than acquiring assets like rivals 02, the mobile unit of Telefonica and France Telecom's Orange.

While Vodafone launched bundled landline telephone and internet service in Germany using assets it already owned, it decided not to acquire fixed-line infrastructure in the U.K. Instead, it signed an agreement with giant phone company BT Group, effectively renting technology and repackaging it for customers under the Vodafone brand.

Until now, critics argued Vodafone had taken an even less profitable approach to generating fixed-line revenue in Italy. It partnered with FastWeb to co-market mobile and internet services, rather than launch its own.

However, Vodafone's director of strategy, Alan Harper, previously told Dow Jones Newswires that the operator would acquire assets in on a "case-by-case basis" in certain markets, as long as there was a financially viable reason to do so.

Vodafone To Buy Tele2 Operations In Italy, Spain For GBP537 Million