UPDATE 3-Telefonica considers M&A deals to expand Tech business

* Group keen to expand Tech business

* 1 bln in Telxius tower proceeds to go to future leases (Adds forecasts, executive comment on M&A)

MADRID, May 13 (Reuters) - Telefonica will look for acquisitions to expand its newly-formed Tech business, COO Angel Vila said on Thursday after the Spanish company published first-quarter results in line with forecasts.

Telefonica, like European rivals, has been facing growth issues aside from the impact of the pandemic and has been selling assets to cut debt and fund an upgrade to next-generation 5G networks.

The company is keen to extract value from IOT (Internet of Things), Big Data, cloud, and cybersecurity services provided by its fast-growing Telefonica Tech business.

The group also sees the merger between its British mobile brand O2 and Virgin Media as a sales channel for the Tech unit.

“We’re looking at acquisitions to complement either the footprint or capability of our IOT Tech unit, and will be carving out further units across our markets ... like Brazil,” Vila told Reuters.

“In countries like Germany, where we are less strong on B2B (business-to-business), we could analyse potential targets to acquire a strong position across all products.”

Telefonica’s reported core earnings of 3.42 billion euros ($4.13 billion) were in line with the 3.36 billion euro average forecast from analysts.

Shares in the company rose as much as 4.3% but were down 0.6% at 3.91 euros by 1430 GMT.

“Telefonica offers an attractive asset portfolio,” JP Morgan’s Cazenove analysts said, while highlighting the company’s debt levels given intense competition in the Spanish market.

Telefonica’s sale of its Telxius mobile masts to American Tower should allow the group to shrink net debt by 9 billion euros next quarter - but around 1 billion will go to future rental contracts, CFO Laura Abasolo said.

Similarly, much of the cash generated during the quarter was allocated to spectrum auctions in Britain, Spain and Chile, although Vila said that British spectrum costs proved lower than expected.

Investments in radio frequencies, which are key to building out connectivity in the race to deploy next-generation 5G mobile data, cost Telefonica 694 million euros.

“Spain and Brazil auctions are yet to come, but the UK spectrum acquisitions brought certainty,” Vila told analysts, adding that cost control helped the UK business performance.

“We expect (this performance) to continue thanks to synergies generated by our joint venture transaction,” Vila said, referring to the merger deal between Virgin and O2.

Net profit stood at 886 million euros, more than twice as much as the same quarter a year ago as Telefonica recovered from the economic paralysis caused by COVID-19 lockdowns imposed last spring.

Telefonica’s debt also shrank by 6.4% to 35.8 billion euros while earnings per share more than doubled year on year to 15 euro cents. ($1 = 0.8282 euros) (Reporting by Clara-Laeila Laudette; additional reporting by Isla Binnie and Jesus Aguado Editing by David Goodman and Jane Merriman)