* Combined unit would be second to Vodafone in Ireland
* Sale to help Telefonica cut debt
By Conor Humphries and Clare Kane
DUBLIN/MADRID, June 24 (Reuters) - Indebted Spanish groupTelefonica has agreed to sell its O2 Ireland mobilebusiness for at least 780 million euros ($1 billion) in cash toHutchison Whampoa's local unit 3 Ireland, it wasannounced on Monday.
The deal, which is subject to regulatory approval, wouldquadruple 3 Ireland's market share to 37.5 percent and followsHutchison's failed bid last year for eircom, which owns thecountry's third-biggest mobile operator Meteor.
For Telefonica, which has been hit hard by the downturn inits home market, the sale will help it in its aim to cut debt bya further 5 billion euros by the end of the year.
In the past decade Hutchison has built a presence in sixEuropean markets, including Britain and Italy, but has struggledto make a profit as it remains smaller than domestic rivals.
Last year its Austrian unit bought Orange Austria fromFrance Telecom and more recently has been in talks withTelecom Italia about merging with its local unit 3Italia..
"This gives us the scale and financial strength to drivecompetition," said Robert Finnegan, chief executive of 3Ireland. "We will continue to be aggressive in the market goingforward and we would like to be number one in due course."
He said he was confident the deal would be completed inbetween six and nine months as it will likely be referred to theEU for competition review.
The EU's antitrust watchdog has been concerned in the pastwhen mobile markets go from four to three players becauseconsumer prices could rise
02 and 3 Ireland together would give Hutchison a marketshare of 37.5 percent, just behind Vodafone's 39.4percent and ahead of Meteor's 19.7 percent, according to thelatest quarterly data from the Irish regulator. Virtual operatorTesco Mobile trails in fourth place with 3.4 percent.Currently 3 Italia has a market share of 9.4 percent.
A 2 billion euro offer from Hutchison Whampoa for Meteorparent eircom was rejected last year in favour of adebt-restructuring deal that put the group's most senior lendersin control.
The terms of the Telefonica sale include an additionaldeferred payment of 70 million euros if certain financialtargets are achieved and the phasing out of the O2 brand,Hutchison said.
The combined firm will have 120 stores in Ireland, whosedomestic economy continues to stagnate, five years after theeconomy collapsed when a housing bubble burst. The two companieshad combined revenues of 803 million euros in 2012.
Telefonica, which piled up debt during a decade-longexpansion into Latin America aims to cut its borrowings to under47 billion euros by the end of the year from 52 billion at theend of March in a bid to maintain its investment grade rating.
Telefonica also sold some Central American assets in Marchfor $500 million and could consider a sale of its Czechbusiness, analysts have said.
O2 Ireland generated 136 million euros of revenue in thefirst quarter, lower than any of the company's other Europeanbusinesses, and down 12 percent year-on-year.
Analysts at Espirito Santo said the O2 Ireland sale was agood move for Telefonica despite the sale price being at a 10percent discount to fair value, since the business was small andnot central to its strategy.
"This should enable Telefonica to reduce its leverage byapproximately 1 percent at the end of 2013," they said in anote.
Analysts at Bankia Bolsa pointed to Telefonica's real estateassets and a remaining 5 percent stake in China Unicom as other likely candidates for sale.
In another sign of consolidation in Europe's telecomsindustry, Vodafone on Monday agreed to buy Germany's largestcable operator, Kabel Deutschland for $10 billion.
Deals in the sector globally have risen 141 percent in theyear to June 1, according to Thomson Reuters data.
Tesco (TSCO)
Vodafone (VOD)