NEW YORK (TheStreet) -- Vodafone (VOD) has gained about 1.4% Monday on news the British telecom giant had agreed to buy Spanish cable company Ono for 7.2 billion euros ($10 billion). The deal will be funded from existing cash and debt.
Vodafone has had ambitions to expand its telecom operations across Europe. The strategy to add fixed-line networks to supplement the company's mobile services has failed.
But management believes the Ono deal is an important first step to unite an industry that is scattered among 150 major telecom operators, which often function across national lines. This has caused (among other things) confusion and (at times) conflicts with various telecom standards.
Ono is Spain's leading provider of broadband, pay-TV and fixed communications to 2 million customers.
Even more impressive is that Vodafone will now own the largest next-generation network in Spain, reaching more than 7 million homes and more than 40% of consumers in Spain.
The acquisition gives Ono a price-to-earnings ratio of 7.5, which is not expensive at all.
Vodafone has plenty of money to make acquisitions. Its challenge has been improving its execution, particularly its inability to extract value from its emerging-market operations, which has frustrated shareholders.
Today, however, the company's investors have plenty to be excited about. Chief Executive Vittorio Colao once promised that he would do a deal that would "transform" the company. It looks like he has made good on this promise.
There are plenty of reasons to suspect that Colao will be right on this bet. Vodafone reported a 10% decline in European revenue for the three months ended in December. I don't want to say the company's back was against the wall, but something needed to be done.
This is Vodafone's second acquisition in six months. Back in September, the company acquired a controlling stake in German cable operator Kabel Deutschland.
The Ono deal, which is expected to be accretive to adjusted earnings per share, also complements Vodafone's agreement with French telecom operator Orange to build out fibre networks in Spain.
All told, Vodafone's management hit a home run. It remains to be seen how well the company can execute to extract value from its investment. But by every measure, this was a well thought-out deal.
The stock is still down about 5% so far this year, so these shares look cheap, given the value-creating opportunity that management expects Ono to bring.
At a minimum, sometime in the second half of the year, Vodafone should regain its 52-week high, which suggests possible upside of about 12%.
At the time of publication, the author held no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.