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Spanish telco Telefonica and France’s Vivendi have emerged as the sole contenders to buy Digital Plus, Spain’s biggest pay TV operation.

The two companies have held talks to launch a joint play for the digital paybox, which Spanish media group Prisa put up for sale last May in order to scythe debt, according to a Financial Times report.

Vivendi held a longterm minority stake in Digital Plus, before selling last year.

If a joint buy went through, “Vivendi would get to run the show, while Telefonica could add content to its own pay TV operation, IPTV Imagenio,” said a Madrid analyst.

According to Spanish website Negocio, a joint bid would see Vivendi taking a 75% stake in Digital Plus, Telefonica the rest.

Spain’s socialist government is likely to welcome a bid that sees part of Digital Plus remaining in Spanish hands.

The major roadblocks to a deal remain price and market conditions.

Debt-crunched, Prisa cannot afford to sell Digital Plus, which includes premium paybox Canal Plus Espana, for less than Euros3 billion ($3.8 billion).

According to Spanish press reports, Vivendi and Telefonica aren’t looking to pay more than $3.2 billion for Digital Plus.

“Digital Plus has had difficulty in adding subscribers and raising average subscriber payments in a TV environment that has steadily become more competitive and where room for improvement appears limited,” said Francois Godard at Enders Analysis.

Having mulled an offer, Spanish broadcaster Telecinco, controlled by Silvio Berlusconi’s Mediaset, ruled itself out of the running last Thursday, given the tough market conditions in Spain.

Prisa needs cash. In December 2007, it pulled down a $2.5 billion syndicated loan, led by London-based HSBC Bank, in what now seems like a highly overpriced operation, to raise its stake in Digital Plus owner Sogecable from 50% to 100%. The loan is due in March.

Consensus is that Vivendi and Telefonica are likely to let Prisa sweat before launching an official bid for Prisa.

Prisa’s share price, 76% down on its peak this year, has already factored in the possibility of nobody at all buying Prisa.

That scenario would force Prisa to renegotiate terms with its bank lenders, or sell off other assets or raise cash via a rights or make a convertible bond issue, said the analyst.

“Prisa is pretty well already in the hands of the banks,” he added.

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