Tender Offer for Terra Lycos

Telefonica SA
28 May 2003





                            ANTONIO J. ALONSO UREBA

                          Director, General Secretary

                    and Secretary of the Board of Directors

                              TELEFONICA, S.A.






                               SIGNIFICANT EVENT






In accordance with article 82 of the Spanish Stock Market law 24/1988 of 28th
July and regulations thereunder, and for public disclosure as a significant
event, we hereby inform that:


Following the resolution adopted by the Board of Directors of TELEFONICA S.A.
in the meeting held today in Madrid, TELEFONICA S.A. has filed with the
Spanish securities regulator (Comision Nacional del Mercado de Valores) the
mandatory application (and related draft prospectus thereof) for the
authorization of a Public Tender Offer to purchase all of the shares of TERRA
NETWORKS S.A. listed in the Spanish Stock Exchange and in the Nasdaq (National
Market, USA).


The aforementioned Offer is structured as a purchase in cash, 5.25 euros being
paid for each share of TERRA NETWORKS, S.A.


The Offer is contingent on the acquisition by TELEFONICA S.A. of such number
of additional TERRA NETWORKS S.A. shares that, taken together with the
230,792,328 shares of TERRA NETWORKS S.A. owned by TELEFONICA S.A. on this
date (these 230,792,328 shares having been blocked until the result of the
Public Offer is published) allows TELEFONICA S.A. to reach a minimum of 75%
in the share capital of TERRA NETWORKS S.A. on the date on which the results of
the Offer are published. TELEFONICA S.A. has expressly reserved its right to
waive such condition (minimum amount of shares accepting the Offer).


Please find below a copy of the press release that will be delivered to the
media and where additional information about the purpose, scope and other
details of the Offer may be found.








                                                          Madrid, May 28th, 2003








                                 PRESS RELEASE




03/28/03


The Offer will allow Telefonica Group to lead and fully capture the Internet
business opportunity in its natural markets


TELEFONICA LAUNCHES A TENDER OFFER FOR 100% OF TERRA LYCOS MINORITIES


  • The Offering, equivalent to 5.25 Euro per share, implies a premium for
    Terra Lycos shareholders of 51% above the market value of the business,
    significantly higher than the upside potential of Terra as an independent
    company.


  • The transaction gives answer to the continuous changes of the Internet
    business model and pursues to capture the benefits derived from the assets
    restructuring and their integration with the wireline operations of the
    Group.


  • The restructuring will allow the Group to improve its offer of Internet
    integrated products and services, especially for broadband, taking full
    advantage of the complementary capabilities and strengths of the different
    companies.


  • Business repositioning and costs and investments savings will improve
    Telefonica Group's EBITDA by 269 million Euro for the 2003-2006 period.




Madrid, May 28 2003.- The Board of Directors of Telefonica has approved today
the launching of a cash tender offer for 100% of Terra Lycos shares. The Offer
of 5.25 Euro per share is subject to a minimum level of acceptance of 75% of its
capital base and would imply a maximum payment for Telefonica of 1,726 million
Euro.


The Offer implies a premium of 15% above Terra Lycos average price for the last
6 months, and values the equity of the company in 2,938 million Euro.
Nevertheless, excluding the value of the cash position of Terra Lycos (1,731
million Euro or 3.09 Euro per share) is excluded, the Offer implies the payment
of a premium of 51% above Terra Lycos business market value, price significantly
higher than the upside potential of Terra as an independent company.


Since Terra IPO in November 1999, Internet business models have experienced
extremely deep transformations, that have been reflected in the evolution of
their growth, profitability and valuation expectations, and consequently in the
behavior of the Internet sector in the stock markets. This evolution has been
affected by the non-fulfillment of on-line advertising and e-commerce
expectations, the difficulties in monetizing contents, and the restrictions to
access financing sources in a difficult macroeconomic environment.


Telefonica has actively managed this changing and increasingly demanding
environment, adapting continuously to the changes, and supporting Terra Lycos in
building up a solid and independent business model through the contribution of
financial resources and the development of strategic agreements (IPO in November
1999, capital increase by 2,194 million Euro in September 2000 at 62 Euros per
share, Bertelsmann agreement,...).


At the same time, Internet has become a key business opportunity for telecom
operators, due to both the growth in Internet usage as a communication tool
(value added services, mail, data transmission, corporate networks access,
etc.), and to the increasing demand of integrated telecom products and services
combining connectivity, Internet access and value added contents. The
exploitation of this opportunity demands a closer integration among
telecommunication providers, ISPs and VAS providers, to combine wireline
operators connectivity capacity with the strengths in design and development of
on-line communication services, contents and products of Internet operators.


Broadband development has accelerated even further the need for integration, due
to both the growing investment needs required by the increase in information
transmission capacity and the higher technical complexity of platforms, and to
the higher efficiency ratio demanded by the business. These goals can only be
met through the operators' capacity to generate economies of scale.


Benefits from assets restructuring and integration will materialize in all the
markets where Telefonica is the wireline incumbent operator, as it will combine
the management of more than 43 million fixed lines and 1.7 million and ADSL
customers, with Terra Lycos' strength in Internet with more than 4 million
access customers and 1.8 million communication and portal services pay
subscribers. Thus, Telefonica Group will reinforce its commercial positioning
towards the client, optimizing investments for the development of applications
and platforms, and speeding up the design of integrated telecommunication
products and services tailored to its client needs, especially for broadband. To
achieve these goals, Telefonica will fully benefit from the complementary
capabilities and strengths of the different companies within the Group.


As a result of the strategic restructuring and integration, Terra will continue
as a specific business line of Telefonica Group, developing its brand name
potential for residential and SOHO segments, integrating the Group's portal and
on-line content offering, and minimizing its corporate, support and
administration structures. Telefonica Group will integrate the access platforms
to provide its customers with services with the highest quality and satisfaction
standards.


Likewise, asset restructuring and integration will simplify the execution of the
Strategic Alliance signed by Telefonica and Terra Lycos at the beginning of
2003, guarantying its full development and potential.


Regarding Lycos USA, Terra will manage the company as an independent business,
adapting it to the US Internet market, and transferring US best practices to the
rest of Terra.


As a consequence, the Group's Internet business repositioning, and the savings
in costs and investments derived from the business restructuring, and the
elimination of redundancies, Telefonica Group's EBITDA will improve in 269
million Euro in the period 2003-2006.


                      This information is provided by RNS
            The company news service from the London Stock Exchange