REFILE-UPDATE 2-Masmovil targets Euskaltel to gain ground in crowded Spanish telecoms market

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* Euskaltel shares hit five-year high

* Merged company would compete with three bigger players

* Biggest shareholder says deal is “a slam dunk”

MADRID, March 29 (Reuters) - Spanish telecoms group Euskaltel said on Monday it would cooperate on a 2-billion-euro ($2.35 billion) takeover bid by larger rival MasMovil, which is set to shake up the country’s competitive market.

Shares in Euskaltel surged 16% in early trade on Monday, a day after MasMovil announced a friendly takeover bid for the company, with an offer priced at a 16.48% premium to Friday’s closing price.

Euskaltel’s major shareholders Zegona, Kutxabank and Alba Europe - which combined own 52.32% of Euskaltel - have agreed to accept the offer of 11.17 euros per share, MasMovil said on Sunday.

Zegona Chief Executive Eamonn O’Hare told Reuters that eight other investors needed to agree to back the deal. “It’s going to be a slam dunk,” he said.

Euskaltel said it would give MasMovil “needed support” that was reasonable to carry out the takeover and prepare documents to secure approval from regulators.

Euskaltel, which had focused on the Spanish regions of the Basque country, Galicia and Asturias, pushed outside of its traditional market last year when it offered British billionaire Richard Branson’s Virgin brand across Spain.

A merger with Masmovil could create stronger competition for Spain’s three main telecoms operators Telefonica, Vodafone and Orange.

Euskaltel’s share price hit its highest level in five years on Monday, adding about 0.3 billion euros to the company’s market value.

Euskaltel said its board would set out its position regarding the bid.

MasMovil, which is owned by private equity funds, Providence and Cinven, said its approach was friendly and would only proceed if accepted by holders of at least 75% plus one share of Euskaltel’s capital.

Zegona’s O’Hare said he expected the deal to close early in the fourth quarter, chiming with brokers Canaccord Genuity who said in a note that the tender process should take about six months, and faced little regulatory risk.

Euskaltel had been working on selling a 49% stake in its broadband infrastructure arm to help raise cash. O’Hare said that if the Masmovil offer hadn’t come along Euskaltel that stake sale would probably have gone ahead.

$1 = 0.8502 euros Reporting by Inti Landauro, Ingrid Melander, Aida Pelaez-Fernandez, Kate Holton and Isla Binnie; Editing by Edmund Blair, Louise Heavens and Susan Fenton