Control of Colombia Telecom

Telefonica SA
07 April 2006



        Press Release


07/04/06


As the Colombian operator's strategic partner, Telefonica will leverage its
track record and skills in developing traditional telephony and broadband


TELEFONICA TAKES CONTROL OF COLOMBIA TELECOM


  •  Acquires at auction 50% of outstanding shares plus one to take control
     of the Colombian operator


  •  Telefonica will carry out a capital increase of about $ 368 million


  •  The Colombian investment fits with the Company's strategic target of
     maintaining its leadership throughout the region


Madrid, 7 April 2006.- Telefonica to become Colombia Telecom's new strategic
partner in the wake of the auction for a majority stake in the Colombian
operator. As the controlling shareholder in Colombia Telecom, Telefonica will
take over management of the company with ownership of 50% of outstanding shares
plus one.



Telefonica, which already has mobile assets in Colombia, will extend its
presence to the fixed telephony business with this investment. Colombia Telecom,
the country's leading operator, has 2.6 million customers and an extensive fibre
optic network. The outcome of the auction means that Telefonica can now leverage
its skill and experience to successfully develop the fixed line business in
Colombia - both the traditional and broadband businesses - and to analyse the
opportunities to launch cross-technology products and services.



From a strategic standpoint, the acquisition of Colombia Telecom fits with
Telefonica's leadership profile in the region, where it enjoys a presence in
over 13 countries with over 100 million customers. Against this backdrop,
Colombia, where the socio-political and economic environment has been improving
steadily in recent years, represents an important market for Telefonica due to
its size and growth profile.



Transaction close and price



The deal will be formalised on 17 April with the signing of an Investment
Agreement pursuant to which Telefonica will become Colombia Telecom's strategic
partner, taking over management of the operator with ownership of 50% of the
company's shares plus one. The rest of the operator's share capital will remain
in the government's hands. The government will have a put option on its stake,
exercisable in 2022.



In terms of deal price and financing, Telefonica has committed to subscribe in
cash to a Colombian pesos 853.577  million capital increase (approximately US$
368 million) at the end of April to be financed from the Company's free cash
flow.


The agreement also contemplates a modification to the Operating Contract between
Colombia Telecom (in which Telefonica owns a 50% + one share interest and will
assume management) and PARAPAT (the consortium that owns the telecommunications
assets and manages the pension funds of the companies that originally comprised
Colombia Telecom).



Colombia Telecom, which will have the exclusive right to operate the
telecommunications assets, will pay PARAPAT an annual fee for 17 years as
compensation for the use of these rights. This payment, which is tax deductible,
has been set at 350 billion Colombian pesos(1) between 2006 and 2011 and to 480
billion Colombian pesos(2) between 2012 and 2022 per annum. The agreement
establishes that the PARAPAT assets will pass definitively to Colombia Telecom
in 2022.



As part of the deal, Telefonica will receive a fixed management fee from
Colombia Telecom equivalent to 7% of EBITDA between 2006 and 2010 and 3% of
EBITDA between 2011 and 2022, so long as EBITDA exceeds 115% of the payment to
PARAPAT.



From a regulatory standpoint, the deal has already been approved by the
Colombian Department of Trade and Industry.



Other terms of the agreement



As part of the investment agreement, Telefonica will have 180 days from the
signature of the deal to close an alliance between Colombia Telecom and
Telefonica Moviles Colombia or to inject cash of 150 billion Colombian pesos in
Colombia Telecom in the form of investment.



Other sections of the agreement contemplate the merger between Telefonica
Empresas Colombia into Colombia Telecom. Depending on the valuation of the
resulting company, Telefonica could increase its ownership interest in Colombia
Telecom as a result of this merger.



Valuation and value creation



There is strong strategic and financial rationale behind the Colombia Telecom
acquisition. Strategically, the deal meets the Company's selective investment
and organic growth criteria and reinforces Telefonica's leadership position in
the overall region.



In 2005, Colombia Telecom reported revenues of approximately US$900 million and
EBITDA of more than US$400 million. Colombia Telecom, market leader, has 2.6
million customers in fixed telephony and a market share of 60% in long-distance
calls. In addition, the operator has a 5,800 kilometre long, high capillarity,
fibre optic network throughout the country, putting it in an excellent position
for nationwide expansion.



In terms of value creation, Telefonica has identified three key factors. The
Company plans to optimise management of the traditional business by developing
new products and services adapted to customer requirements and local market
characteristics, leveraging its best practices. To this end, it will leverage
the potential opportunities for launching cross-technology customer products and
services. Secondly, Telefonica believes it can optimise and boost the broadband
business, based on its track record as the pioneering provider of this service
in Spain, the Czech Republic and Latin America, in order to increase penetration
in Colombia - currently just 2% - in line with Chile, Argentina, Peru and
Brazil, where penetration stands at 16.6%, 7.2%, 6.4% and 6.2%, respectively.
Finally, Telefonica has identified significant synergies, specifically:



   -  From a regional and global perspective, by applying Telefonica's
      global best practices and leveraging economies of scale. In terms of 
      capex, the ability to purchase network equipment and components on more 
      attractive terms thanks to the launch of a regional purchasing network, 
      the rollout of standardised networks and the centralisation of operations 
      and their monitoring is noteworthy. In addition, Colombia's IT systems 
      will be integrated within Telefonica's regional in-house systems, boosting 
      management efficiency and time to market for services.

  -  In the fixed-mobile business, due to Telefonica's presence in the
     Colombian mobile telephony business via its stake in the country's second
     largest mobile operator, there are synergies in terms of network rollout 
     and support services (call centres, human resources, etc.) as well as 
     opportunities for joint sales promotions.



Transaction timeline



17 April                          Signing of Investment Agreement

End of April                      Subscription in cash to the capital
increase and payment settlement

Beginning of the 2nd quarter      Deal closes

180 days from 20 April            Alliance with Telefonica Moviles or 150
                                  billion million peso cash investment injection




             Para mas informacion / For further information
             Direccion de Comunicacion Corporativa       Tel:  [phone]

             Press Office                                Fax:  [phone]

             Gran Via, 28 - 3a Planta

             e-mail:  [e-mail]

             28013 - MADRID
                                          http://www.telefonica.es/saladeprensa



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(1)  Colombian pesos (value as of 2006)  adjusted by  inflation plus 4%


(2)  Colombian pesos (value as of 2006)  adjusted between 2006 and 2012 by
annual inflation plus annual 4%, and from 2013 by  acumulated inflation plus
annual 4%






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