MADRID British telecoms group Vodafone (VOD.L) has reached a preliminary deal to buy Spanish cable group Ono after raising its initial bid for the company, two people with knowledge of the discussions said on Friday.
The private equity-backed Ono, which sells fixed and mobile phone, TV and internet services, rebuffed an earlier bid from Vodafone in February and decided to go ahead with a planned initial public offering that would value the company at 7 billion euros ($9.6 billion), including debt.
Sources said Vodafone's bid would have to be substantially higher than that value to persuade Ono and its private equity shareholders to drop the listing.
"A meeting took place yesterday between the shareholders and (Vodafone Chief Executive) Vittorio Colao. The due diligence will start this weekend in order to make the offer binding," said one of the sources.
A second source said Ono's private equity shareholders told Vodafone at the meeting that the offer would have to come before March 13, when the cable group is due to formally go ahead with the plan to list on the Madrid stock exchange.
Both Ono and Vodafone declined to comment.
Ono has 1.9 million customers on its cable network that covers 70 percent of Spain, or 7.2 million households out of a total of 16 million.
Having built the network later than other cable and telecom companies, Ono boasts of having broadband speeds of up to 200 megabits per second, or up to 20 times the average speeds of rival networks.
For Vodafone, a purchase of Ono would be its third acquisition in fixed broadband in Europe in two years. The deals are aimed at improving its networks and shoring up its European businesses following the $130 billion sale of its U.S. arm.
Vodafone boss Colao said recently the group could have the capacity to spend $30 billion to $40 billion on acquisitions in coming years and no deal should be too big if it makes strategic sense.
Investment funds Providence Equity Partners, Thomas H. Lee Partners, CCMP Capital Advisors, and Quadrangle Capital own 54 percent of Ono, according to the company's website.
To win over Ono's shareholders and convince them to shelve the planned IPO, Vodafone would have to make an offer "substantially higher than the previous ones," said the second person, adding that it should be in line with recent cable deals in Germany and the Netherlands.
Europe's leading cable operator Liberty Global (LBTYA.O) in January agreed to pay 11.3 times EBITDA for Dutch rival Ziggo ZIGGO.AS in the Netherlands. Vodafone paid 11.9 times EBITDA for Kabel Deutschland last year.
Ono had EBITDA of 752 million euros for 2012, so applying an 11 times multiple on it would translate to a Vodafone bid of around 8.2 billion euros.
The cable sector trades on an enterprise value to 2013 core profit (EBITDA) multiple of 9.4 times, according to Reuters data.