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Terra, Lycos Finally Seal $12.5 Billion Deal

After a flurry of speculation, Terra Networks S.A. announced late Tuesday it was purchasing Lycos Inc. for $12.5 billion in stock.

Terra will pay $97.55 a share for Lycos -- substantially more than its Tuesday closing price of 72-5/8. At that price, Lycos was valued at approximately $6.8 billion. The deal has already been approved by the executive committee of Terra parent Telefonica S.A. When the deal is completed, Terra will own between 54 percent and 63 of the new company, to be called Terra Lycos.

The deal is expected to close in the third quarter and must also be approved by both company's shareholders.

Also Tuesday, Terra announced a strategic agreement with German media conglomerate Bertelsmann, which is a significant shareholder in Lycos Europe. Bertelsmann will purchase $1 billion in advertising and other services from Terra Lycos over the next five years. In addition, Terra Lycos will gain preferred access to a wide range of Bertelsmann properties, including books, music, television and film.

At the same time, Telefonica will underwrite a $2 billion offering and has committed to purchase any shares that are not bought by existing Terra shareholders. Shares will be offered at $56.13 each, which values Terra Lycos at about $30 billion. The company expects to have more than $3 billion in cash on hand after the offering.

Terra Lycos will control 49 percent of a new wireless venture in partnership with Telefonica, named. Terra Lycos will be able to access Telefonica's cable, satellite, broadband and wireless networks serving more than 60 million customers worldwide.

Telefonica Chairman and Chief Executive Officer Juan Villalonga will be chairman of Terra Lycos with Lycos chief Bob Davis becoming the company's chief executive officer. Villalonga and 10 other Terra appointments will sit on the new company's board. Davis, Lycos Chief Financial Officer Ted Philip and another Lycos designee will also become directors.

Villalonga said the deal will create "a new media powerhouse" with unparalleled scale and global reach.

"Terra Lycos will be ideally positioned as a global leader," he said. "We will be at the forefront of Internet and traditional and new media content. We are a mover on the road to global conversion. Our role is to become a leader. The market only rewards the winners, and the winners take all."

"Our combination brings together many complementary strengths that we believe will enable Terra Lycos to generate consistently higher growth in revenue, cash flow and users than either company could expect to achieve independently. The result will be a company uniquely positioned to provide compelling content and functionality for its users..., attractive opportunities for its employees and strong growth for its shareholders," he said.

Davis said the new company would look to capitalize on the convergence between current and emerging connectivity options to give users a better experience and in turn attract, retain and monetize traffic.

"In one fell swoop we went from being a powerful Internet competitor to become a global powerhouse," Davis said. "In one transaction we have transformed the industry. We have combined traditional media and wireless and all of the wonderful new media. The scope of this conversion is unprecedented. We have the ability to take multiple forms of content and all forms of connections and roll them into one."