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November 7, 2005 6:33 pm

Ono set to take on Telefónica’s fixed-line hold

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Telefónica of Spain this week faces its first coordinated challenge in fixed-line telephony and broadband services, following the completion on Friday of the €2.25bn ($2.65bn) takeover by Ono, the cable operator, of rival Auna.

The new company, created through a complex deal largely financed by private equity groups, offers direct-access fibre-optic cable services to 6m homes, or 40 per cent of the total, which Ono hopes to expand to 60 per cent in the next few years.

According to Eugenio Galdón, Ono chairman, this could translate into a doubling of market share in fixed-line telephony, to more than 20 per cent. “In some urban centres where we have fully built out the network we already have about 40 per cent of the market, so I don’t think this is unrealistic,” he told the FT.

The cable tie-up, and the consequent sale of Amena, Auna’s mobile operator, to France Télécom, has rattled Telefónica. Analysts and company insiders have identified the sudden surge in domestic competition as a trigger for its recent €26bn takeover bid for O2, the UK mobile operator.

With coverage in 12 out of Spain’s 17 autonomous regions – accounting for 85 per cent of gross domestic product – the enlarged Ono is the first serious nationwide challenger to Telefónica since liberalisation of fixed-line telephony in Spain in the last 1990s.

With the backing of JP Morgan Partners, Providence, Thomas H. Lee Partners and Quadrangle – and a €3.5bn capital restructuring, Mr Galdón says Ono has the financial “headroom” to invest heavily in network roll-out and product sales. 

Before the deal, Ono was already market leader in some regional centres in pay-TV and broadband internet access, the biggest growth markets in terrestrial telecommunications. Its flat tariff structure in local calls is likely to become the industry benchmark.

Auna, by contrast, has struggled against Telefónica, and a clutch of indirect-access operators, in key urban centres such as Madrid and Barcelona. Part of the problem, according to Mr Galdón, has been weakness in connecting the network to homes and businesses, and winning new clients.

By using Ono’s aggressive marketing style, brand recognition and simplified product line to leverage Auna’s infrastructure in large cities, he hopes to make so-called “triple-play” – broadband internet access, telephony and cable television – the industry standard in Spain.

“From day one, we have been a triple-play company,” he says. Unlike Telefónica, which is having to upgrade and replace much of its network to offer ADSL connections, “Ono didn’t evolve into a triple-play service provider over time” he says.

 In broad terms, the tie-up of Auna and Ono mirrors the proposed merger of NTL and Telewest in the UK: two cable operators with complementary footprints joining forces to provide critical mass against an incumbent operator while saving money in marketing, equipment and content purchasing and administration.

However, unlike the NTL case, Auna’s technological platform is an almost perfect fit with that of Ono. According to Mr Galdón, this leaves the company free to concentrate on expanding the network, connecting it to homes and prising customers away from Telefónica.

“From day one, it’s all been about taking on Telefónica.”

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