Updated from 10:49 a.m. EDT

After days of anticipation,

Terra Networks

(TRRA)

of Spain said Tuesday that it had agreed to acquire

Lycos

(LCOS)

, one of the biggest Internet portals, in a stock swap valued at $12.5 billion.

The companies also announced a strategic pact with German media conglomerate

Bertelsmann

, bringing together dominant U.S. and European players in the telecommunications, Internet services, Internet content and media sectors. The transaction also represents the first purchase of a large U.S. Internet company by a European Internet access provider.

"This company has jumped from a strong Internet competitor to a global powerhouse," Robert Davis, chief executive of Lycos, told a news conference in New York.

Under the terms of the deal, Lycos shareholders will receive $97.55 in Terra ordinary shares, or their equivalent in Terra's American depositary receipts, in exchange for each Lycos common share. That represents a premium of 81% over the Lycos stock price Friday -- before any talks were disclosed -- and 34% over the closing price of Lycos stock Tuesday.

'The deal includes a 20% collar under which Lycos shareholders will receive not less than 1.433 or more than 2.150 Terra shares.

Following completion of the deal, Terra shareholders will own 54% to 63% of the merged company and Lycos shareholders will own the remainder.

Juan Villalonga, the chairman of Terra and its parent company, Spanish telecommunications giant

Telefonica

(TEF) - Get Report

, will be chairman of the merged company, to be known as

Terra Lycos

. Davis, currently president and chief executive of Lycos, will be chief executive of the new company.

The merged companies are expected to post pro-forma revenues of $500 million to $600 million in 2000, Villalonga said, adding that the combined company would have operations in 37 countries.

As part of the transaction, Telefonica has agreed to underwrite a $2 billion rights offering by Terra, which will take place prior to the closing of the deal. The rights offering will be priced at $56.13 per Terra share -- the stock's closing price in Madrid on Tuesday. Following the offering, Terra Lycos will have about $3.5 billion in cash, Villalonga said. He did not say what the company intended to do with the cash.

In addition, Terra Lycos said it will own 49% of a new wireless communications company being established with Telefonica. That company will focus on developing an Internet portal for wireless users, Villalonga added.

A deal between Lycos and Terra had been expected since late Friday, when Terra disclosed to stock market regulators in Madrid that it was in talks with Lycos of Waltham, Mass. On Tuesday, shares of Lycos surged 11, or 18%, to close at 72 5/8. That increase followed a 14%

jump on Monday. In after hours trading Lycos continued to rise, lately trading at 75, according to

Instinet

.

Terra's ADRs, meanwhile, fell 3 5/16, or nearly 6%, to 53 9/16, while Telefonica's ADRs rose 7/8, or 1%, to 66 3/4. In after hours trading, Terra was at 53 1/2, while Telefonica was unchanged.

The purchase would give Terra a wide opening into North America to sell its Web services to the expanding Hispanic population in the U.S. And for Bertelsmann, an alliance would broaden its global reach.

Bertelsmann said it would buy $1 billion in advertising, placement and integration services from Terra Lycos over the next five years.

As the "preferred content provider" on Lycos, Bertelsmann will get more prominent display, advertising and special promotions through the Lycos portal, which ranks fourth in size in the U.S. in terms of visitors.

Lycos and Bertelsmann now jointly own

Lycos Europe

, the third-most-visited network of Web sites in Germany.

The companies expect to complete the merger in third quarter 2000.