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* Deal is 3rd buy of European fixed-broadband asset in 2 yrs
* Allows Vodafone to offer combination of services in Spain
* Vodafone targets around 240 mln euros savings per year
* Price is multiple of 10.4x Ono's operating free cash flow
By Kate Holton
LONDON, March 17 (Reuters) - Vodafone has agreed tobuy Spain's largest cable operator Ono for 7.2 billion euros($10 billion), the latest hefty deal in a European telecomssector starting to rebuild as the region recovers from arecession.
The British group said on Monday it would use some of the$130 billion proceeds from the sale of its U.S. arm to acquireOno, with a superfast cable network and 1.9 million customers,to create a stronger challenger to market leader Telefonica.
The deal for private equity-owned Ono is Vodafone's thirdpurchase of a European fixed-broadband asset in two years,following similar moves in Britain and Germany, enabling it tooffer fixed-line and mobile services, pay-TV and broadband,while saving money on building and operating its networks.
The agreement, which comes as the French market undergoes asimilar transformation, could also spark more consolidationwithin Spain as players such as France's Orange seekout acquisitions to avoid falling behind.
Orange has been linked with Jazztel, Spain'sfourth-biggest telecoms operator, while Yoigo, owned by Sweden'sTeliasonera, is also seen as a likely target, analystssay.
Shares in Vodafone were up 1.4 percent in midday trading,outperforming the FTSE 100 index, and shareholders havegenerally been supportive.
"Historically, Vodafone has been a pure mobile operator," Henri Tcheng, a partner at consultants BearingPoint said. "Butthe future of telecoms includes convergence between veryhigh-speed broadband, mobile and fixed so I would describe thisas a compulsory move for Vodafone.
"It is quite a high valuation, but in any given country thecable operator is in a unique place for mobile operators. Soeven if it is expensive, it is not a bad deal."
Ono, which had been in the process of preparing for a stockmarket flotation, has 1.9 million customers on its network thatcovers 70 percent of Spain, or 7.2 million households out of atotal of around 16 million.
Having built the network later than other cable and telecomcompanies, Ono can achieve broadband speeds of up to 200megabits per second, or up to 20 times the average of rivalnetworks.
And its footprint in more rural areas fits well with thesuperfast network Vodafone is currently co-building with Orangein major cities including Barcelona and Madrid. Vodafone said onMonday it would not commit to a second stage of the roll-outwith Orange.
The British group, which is ramping up spending on itsEuropean networks to boost speeds, said the deal would enable itto save around 240 million euros per year, before integrationcosts, by the fourth full year after completion.
It also expects to generate revenue of around 1 billioneuros as it seeks to cross-sell its mobile offering to Ono'scable customers, and vice versa.
STABILISE THE MARKET
The planned savings and the appeal of the superfast network,which will also enable the British group to offload some of itsmobile traffic and stop paying so much to rent lines fromTelefonica, helped soften the blow of the hefty multiple thegroup is paying compared with typical telecoms valuations.
A 7.2 billion euro price tag implies a multiple of 10.4times the target's operating free cash flow, broadly in linewith recent deals in the European cable sector.
But it is almost double the 4 billion euro value assigned bybankers to Vodafone's current mobile business in Spain, whichwith almost 14 million customers at the end of December dwarfsits new acquisition.
"Vodafone has seen revenues and core earnings from itsSpanish operation decline by an aggregate of 38 percent and 60percent between 2010 and 2014 estimations," Jefferies analystJerry Dellis said in a note to clients.
"Securing a more credible fixed to mobile convergentoffering on a faster timescale than a self-build could deliveris vital to stabilising that momentum."
According to the Spanish regulator, Vodafone had almost 25percent of the mobile market, and the deal which includes Ono's1.1 million mobile customers is likely to increase that byalmost 2 percentage points. Orange has around 23 percent of themarket.
In the provision of fibre, Vodafone would now be number one.
Analysts said they expected regulators to approve the dealwithout requiring Vodafone to make any concessions.
The deal for Ono will be financed from existing cashresources and committed but undrawn bank facilities. MorganStanley advised Vodafone on the deal while Deutsche Bank actedas the lead financial adviser to the shareholders of Ono.
Ono is 54 percent owned by investment funds ProvidenceEquity Partners, Thomas H. Lee Partners, CCMP Capital Advisorsand Quadrangle Capital.
