May 14 (Bloomberg) -- Telefonica SA Chairman Cesar Alierta may be preparing for acquisitions in 2008 after keeping Europe's biggest telephone company away from mergers for two years.

The Madrid-based company, which has more than 200 million customers in 23 countries, spent $80 billion on acquisitions this decade to become the largest former European phone monopoly by market value, and the one with the most debt. Alierta may seek new overseas targets to sustain profit and sales growth.

``Alierta's plans include more acquisitions,'' said Alberto Espelosin, a fund manager at Ibercaja Gestion in Zaragoza, Spain, which oversees $7 billion and holds Telefonica stock. ``In the long term we will see a merger with Telecom Italia. Also, the company lacks a presence in the U.S. and they may expand there.''

Telefonica may say on May 16 that first-quarter sales rose to 13.6 billion euros from 12 billion euros a year earlier, according to the median estimate of seven analysts in a Bloomberg News survey. Net income probably rose 7.1 percent to 1.25 billion euros, the survey by phone and e-mail showed.

Profit beat analysts' estimates in seven of the last eight quarters. Operating income before interest, tax, depreciation and amortization probably rose 9.2 percent to 5.12 billion euros.

Alierta's self-imposed ban on takeovers costing more than 1.5 billion euros ($2 billion) ends this year. Telefonica last month purchased 10 percent of Telecom Italia SpA, Italy's largest telephone company, for 2.3 billion euros, gaining two seats on the board.

Digesting O2

Telefonica completed the 17.7 billion-pound ($35.3 billion) takeover of O2 Plc, Britain's largest mobile-phone company by customers, in February 2006.

With O2, Telefonica's debt ballooned to 52.1 billion euros last year from 29.5 billion euros a year earlier. Standard & Poor's rates the company's debt BBB+, two levels above speculative grade. Moody's Investors Service has an equivalent rating of Baa1. Alierta has said those are ``floor'' ratings.

The O2 takeover surprised some investors and led them to question the company's strategy. Alierta responded by imposing a spending limit for takeovers of 1.5 billion euros through the end of 2007. The restriction excludes funds from asset sales, which can be used to increase the budget for acquisitions.

Endemol Sale Plan

Telefonica today said it agreed to sell its 75 percent stake in television production company Endemol NV for 2.63 billion euros to a group made up of former Italian Prime Minster Silvio Berlusconi's MediaSet SpA, Endemol founder John de Mol and Goldman Sachs Group Inc. The Spanish phone company got 1.9 billion pounds ($3.8 billion) in April from the sale of O2's Airwave 02 Ltd.

Telefonica teamed up with a group of Italian investors last month to spend 4.1 billion euros on a controlling 18 percent stake in Telecom Italia.

The Spanish company, Assicurazioni Generali SpA, Intesa Sanpaolo SpA, Mediobanca SpA and the Benetton family are in the process of buying Olimpia, the investment vehicle that controls the board of Milan-based Telecom Italia, from Pirelli & C. SpA.

``Telefonica will continue to buy companies whenever it can to add growth,'' said Nahum Sanchez, an analyst at Caja Madrid Bolsa, who has a ``neutral'' rating on the stock. ``The company has proven it can extract value from takeovers.''

Alierta reiterated in September that Telefonica wants to buy Portugal Telecom SGPS SA's stake in Brazil's Vivo should it be put up for sale. Telefonica and Portugal Telecom jointly control Vivo, Brazil's largest mobile-phone company.

Bigger Deals

Telefonica might consider bidding for Royal KPN NV, said Juan Carlos Acitores, an analyst at Ahorro Corporacion who rates Telefonica stock ``buy.'' KPN, the biggest Dutch phone company with a market value of 23.5 billion euros, competes with O2 in Germany. Telefonica spokesman Miguel Angel Garzon declined to comment on possible plans to bid for KPN.

``Alierta's ambition is to create the largest European phone operator,'' Madrid-based Acitores said. ``Next for Telefonica is KPN and Telecom Italia may follow in the longer term.''

Telefonica may attempt to buy KPN in 2008 with new stock to limit the effect on debt ratings, said Acitores.

Alierta's drive to enlarge Telefonica has helped the stock outperform its main European peers. Since a March 2000 peak, Telefonica shares have lost 42 percent. In the same period, the 24-member Bloomberg Europe Telecommunication Services Index has plunged 71 percent. Shares of Deutsche Telekom AG and France Telecom SA, Europe's largest and third-biggest phone companies by sales, fell 88 percent and 87 percent, respectively.

Shares of Telefonica fell 0.2 percent to 16.73 euros as of 1:44 p.m. today.

Doubling Dividends

The 62-year-old executive also pledged last year to double the dividend and per-share profit from 2005 levels through 2009, and to spend 2.7 billion euros to buy back stock before the end of this year.

Alierta, who was named chairman in 2000, received a salary and bonus of 2.3 million euros in 2003, the last year the company disclosed his compensation package.

Of the 33 analysts covering Telefonica this year, 25 advise buying the stock, six rate it the equivalent of ``sell'' and the rest have neutral ratings, based on data compiled by Bloomberg.

Credit-default swaps based on 10 million euros of Telefonica debt have declined to 26,000 euros from a peak of 63,000 in the months following the announcement of the O2 purchase, based on prices compiled by Bloomberg. Credit-default swaps are used to speculate on a company's ability to repay its debt or to protect against bondholder losses. A decline indicates improving credit quality.

To contact the reporter on this story: Paul Tobin in Madrid at ptobin@bloomberg.net

Last Updated: May 14, 2007 07:46 EDT