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Telefonica Net Up 40%, Eyes on Acquisitions

Telefonica reported a 40.2% rise in its net profit, beating the average market forecast, but analysts were focused on the company's 2007 outlook due later on Thursday and any news about possible acquisitions.

Net profit rose to 6.23 billion euros ($8.24 billion) in 2006, boosted by a round of purchases and a strong operating performance. Analysts polled by Reuters Estimates had forecast net profit of 6.01 billion euros on average.

Analysts said, however, that results were overshadowed by questions about possible acquisitions - particularly in Italy - despite sources at the company having signalled earlier this week that it was unlikely to comment on the issue.

Added to that, some analysts expect the outlook for 2007, which the company is due to give ahead of a conference call, to be tougher.

Telefonica shares were down 0.6% at 16.2 euros versus a 0.1% fall in the DJ Stoxx telecom index.

"(Mobile) competition was just starting in Spain in 2006 and 2007 could be much more complicated. If you add to that the risk of acquisitions... " said Caja Madrid analyst Nahum Sanchez.

"But the results were very strong," he added. "Especially if you put them against Deutsche Telekom."

Deutsche Telekom reported a 43% drop in full-year net profit on Thursday.

"Results are a little better than expected, but in a way people were expecting that. What we are interested is M&A," said Adrian Serrano, analyst at Norbolsa.

ITALIAN EXPANSION

A Telefonica source told Reuters on Tuesday that the group was still considering buying a minority stake in Olimpia - which controls Telecom Italia - but no decision had been reached.

Mobile telephony continued to be the main driver behind strong results at Telefonica, Europe's second-largest telecoms firm, providing roughly one third of group revenues excluding last year's British wireless purchase 02.

Total revenue grew 41.5% to 52.90 billion euros - well ahead of an average forecast of 52.54 billion euros.

Revenue growth without acquisitions was up 7.8%, which compared with larger rival Vodafone's guidance of 5-6.5% for the year.

Wireless growth in Spain accelerated slightly in the fourth quarter, counter to market expectations. Telefonica said broadband and TV access also did well in the last quarter.

British wireless unit O2 said separately it had added 825,000 new mobile users in the last quarter of 2006, pushing its total mobile user base to 35.2 million.

O2 said its UK unit added a net 295,000 new customers and its German business added 396,000 new users.

Telefonica's operating income before depreciation and amortisation rose 27% to 19.13 billion euros, which was below the average forecast of 19.25 billion euros in the poll.

Total group accesses rose 32.4% to 203.2 million.

Results are not directly comparable with 2005 as they include purchases - O2 and Czech telecoms group Cesky - and more than 1.5 billion euros in capital gains from the sale of directories arm TPI to Britain's Yell.

Reuters data shows Telefonica shares trading at 12.6 times forecast 2007 results which compares with an average of 12.40 times for Europe's five biggest telecoms companies.