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VOD Gets Fixed in Italy & Spain

Vodafone Group plc (NYSE: VOD) announced over the weekend a €775 million ($1.1 billion) agreement to buy fixed-line assets from Tele2 AB (Nasdaq: TLTO) in Italy and Spain on a debt-free basis. (See Vodafone Buys Tele2 Units.)

With the Tele2 units, Vodafone gains fixed-line infrastructure and a customer base on which to grow. In Italy, Tele2 has 2.6 million customers, of which 400,000 are broadband subscribers. And in Spain, Tele2 has 550,000 customers, of which 240,000 are broadband subscribers.

With this acquisition, analysts say Vodafone has finally made good on its plans to provide fixed broadband services in its key European markets. It's part of a strategy, unveiled in May 2006, to offer bundles of fixed and mobile services in Europe. (See Vodafone Unveils Convergence Plans.)

"Vodafone has now resolved its fixed broadband distribution needs in all four of its major European markets, and we now expect any other deals to be modest," says the analyst team at Dresdner Kleinwort in a research note.

In Germany, Vodafone can provide bundled services by buying wholesale DSL capacity from its sister company Arcor AG & Co. KG , which it inherited as part of the acquisition of Mannesmann back in 2000.

In the U.K., Vodafone has a deal with BT Group plc (NYSE: BT; London: BTA) to resell the British incumbent's wholesale DSL service. (See Brits Get Cozy, Vodafone UK Offers DSL, and Vodafone UK Launches DSL.)

In Italy, Vodafone attempted to offer bundled broadband and mobile services through a short-lived partnership with Fastweb SpA (Milan: FWB), which was held up by the lack of mobile number portability. (See Vodafone, FastWeb Team Up, Fastweb Plays Wireless Waiting Game , and Italian FMC Face-Off.)

Now in Italy and Spain, Vodafone has its own fixed-line infrastructure, which includes local loop unbundling in major cities.

Vodafone plans to substantially increase the local loop unbundling coverage in these countries during the next twelve months, which will be good news for DSLAM equipment vendors. In Portugal, Vodafone already uses DSLAM equipment from Alcatel-Lucent (NYSE: ALU) to offer bundled services through local loop unbundling. (See Vodafone Uses AlcaLu DSLAM, Vodafone Portugal Offers DSL, and Mobile Giants Size Up DSL.)

Vodafone needs a good growth story in Europe, where average revenues per user (ARPU) are under pressure. And in the Italian and Spanish broadband markets there is still room for growth. According to Vodafone, broadband penetration in Italy and Spain will be 44 percent and 57 percent, respectively, by the end of this year. (See Carrier Scorecard: Vodafone.)

This latest acquisition could make Vodafone more aggressive in these markets, writes Ovum Ltd. analyst John Delaney in a research note.

"We should expect Vodafone to pursue broadband business more aggressively in those countries, and to take a less low-key approach in marketing mobile/DSL bundles," Delaney writes. "[The acquisition] will position Vodafone better to match the value-added services offered by the existing broadband providers in Spain and Italy -- particularly IPTV, where the Spanish and Italian markets are more advanced than the U.K. and Germany."

— Michelle Donegan, European Editor, Light Reading

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