By Andrés González and Kate Holton
MADRID/LONDON (Reuters) - Directors of Spain's largest cable operator, Ono, on Tuesday agreed to push ahead with their plan to list the company on the stock market and deferred a takeover approach from Britain's Vodafone (LSE:VOD.L - News), a source with knowledge of the matter said.
Ono, which sells fixed and mobile phone, TV and internet services, had been preparing for a 7 billion euro ($9.6 billion) stock market sale to capitalize on high investor interest in European cable firms when the British telecoms operator approached its private equity owners about a takeover.
A combined entity, building on Vodafone's strength in mobile services and Ono's position in broadband internet and TV packages would offer the biggest challenge yet to Spanish market leader and former monopoly Telefonica (MCE:TEF.MC - News).
In response to a five-year economic downturn, Telefonica has turned the market ultra competitive by folding the four services of mobile, fixed-line, broadband and pay-TV into one cheaper offering for cash-strapped consumers.
The source, who had been briefed on the board's discussions, said the directors had agreed on a plan to first carry out a capital increase of 800 million euros and later sell existing shares for a total amount of at least 200 millions euros.
Ono believes it has an enterprise value of around 7 billion euros ($9.5 billion). Based on this price, about 25 percent of the company would float on the stock exchange after the listing.
The source however said that a potential takeover offer from Vodafone had not been discussed at the meeting.
"The board has given the green light to the IPO. At today's meeting there has been no discussion over a formal offer for the company," the source said, on condition of anonymity.
Vodafone declined to comment. Ono was not immediately available to comment.
With one offer already rejected as too low by Ono, Vodafone is now having to decide how much it is willing to pay for a company that is no longer growing.
All operators in Spain have slashed prices and reduced margins to keep customers and the prospect of a quick rebound following the end of the recession last year is weak, with more than a quarter of the workforce unemployed and consumer spending at record lows.
Liberty went head to head with Vodafone over the purchase of Germany's Kabel Deutschland (KD8Gn.DE) last year, eventually pushing up the price that the British group had to pay.
Sources with knowledge of the matter have said that any buyer could have to pay up to 9 billion euros to convince Ono's owners to drop their plans for a stock market sale.
Vodafone, the world's second-largest mobile operator by subscribers, has made a second bid for Ono as part of its strategy to improve its networks following the $130 billion sale of its U.S. arm this month.
Chief Executive Vittorio Colao said on Monday 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.
Although he declined to comment specifically on Ono, he said that his company is interested in Spain.
Investment funds Providence Equity Partners, Thomas H. Lee Partners, CCMP Capital Advisors, and Quadrangle Capital own a controlling 54 percent of Ono, according to the company's website.
Ono has 13 board members, but the funds that control the 54 percent stake only hold five seats so they would have to convince at least another two board members to back a deal.
Other shareholders include General Electric Structured Finance (NYSE:GE - News), Canada's institutional fund La Caisse de depot et placement du Quebec and Spanish investment vehicles Val Telecomunicaciones and Multitel.
Several of them have suggested they would be ready to sell their stake. ($1 = 0.7327 euros)
(Writing by Julien Toyer, editing by Erica Billingham and William Hardy)