Last checked at 
* Telefonica shares rise, only strong gainer
* Deal would help highly-indebted company cash out
(Recasts with share rise, broker comment)
By Inti Landauro and Isla Binnie
May 4 (Reuters) - Shares in Spain's Telefonica SA
rose on Monday to post the only strong gains on an otherwise
almost entirely red Madrid index, after the company confirmed it
was in talks with billionaire John Malone's Liberty Global Plc
over a possible merger of their respective businesses
in Britain.
The two have started a negotiation process to merge
Telefonica's British mobile operator O2 and Liberty's Virgin
Media network company, the Spanish company said in a stock
market filing.
There is "no guarantee, at this point, of its precise terms
or its probability of success," Telefonica added.
Two sources familiar with the matter told Reuters on Friday
that talks were ongoing.
Telefonica shares rose shortly after Monday's market open
and were trading 3.2% higher on the day at 0809 GMT. It was the
only strong gainer, barring some small positive movements for
stocks including communications tower firm Cellnex.
It would be "potentially positive news for the stock if this
is confirmed" Madrid-based broker CM Capital Markets said in a
note to clients, adding the integration of mobile-focused O2
with a major fixed broadband provider would be complementary.
Telefonica said it would keep markets informed if a
"satisfactory agreement" were reached. The company reports
first-quarter results on May 7.
Along with its large European peers, Telefonica has
struggled to boost profit growth in the face of fierce
competition and reassure investors it can manage a debt pile
which stood at 37.74 billion euros at the end of last year.
Shares are down 30% so far this year, having tracked broadly
downwards for the past five years.
Its UK business, which includes O2, generated 7.11 billion
euros in revenue in 2019, around 14.7% of the group's total, and
had 34.5 mobile connections on its network.
Virgin Media competes with UK pay-TV market leader Sky,
owned by Comcast, in pay-TV, and with BT, Sky,
TalkTalk and others in broadband.
It had 6 million cable customers and 3.3 million mobile
customers as of the end of 2019.
Telefonica has been weighing options for the mobile business
since 2016 when a previous 10.3 billion pound ($12.8 billion) O2
takeover bid from Three UK, controlled by CK Hutchison Holdings
, was blocked by European antitrust regulators.
Combining O2 and Virgin Media would reshape Britain's
telecoms industry, leaving Hutchison and Vodafone
without their own fixed-line consumer networks and raising
pressure on BT.
Uncertainty around the fate of one Britain's biggest mobile
operators, which has been repeatedly touted as a possible
candidate for sale or a stock listing, would end.
The deal would also allow Telefonica a way to partially cash
out from O2 while keeping a presence in Britain, where - along
with Spain, Germany and Brazil - it aims to focus its efforts to
boost revenue by 2 billion euros under a new strategic plan.
($1 = 0.8035 pounds)
($1 = 0.9140 euros)
(Reporting by Inti Landauro,
Editing by Keith Weir and Angus MacSwan)
