MADRID — Spain’s two biggest media companies, telco giant Telefonica and film and TV conglom Sogecable, will merge their digital payboxes in a deal that would not so much reshape as replace the local TV landscape.

The accord, announced May 9, sees Telefonica-controlled satcaster Via Digital, Sogecable premium channel Canal Plus Espana and its digital platform Canal Satelite Digital all rolled into one uber-platform.

The Sogecable-Telefonica combo would have 2.5 million pay TV subscribers, and a $1.2 billion annual turnover.

The revolution lies not just in the merger but how the new partners would go about it.

Telefonica would take 23% in Sogecable via a capital share increase. That would leave Telefonica and its current controlling shareholders — Spanish media group Prisa and France’s Canal Plus Group — with equal stakes in Sogecable.

It would also create, by Spanish terms, a media colossus co-owned by Europe’s largest entertainment company, Vivendi Universal, Spain’s biggest media group, Prisa, and Spain’s biggest telco, Telefonica.

The mega-accord raises a large question: Will this get governmental and European Union approval? Or is this a gauntlet thrown down to both authorities by companies quaking at the future of digital TV in Spain.

Spanish prime minister Jose Maria Aznar is a bitter foe of the socialist-friendly Prisa. Aznar believes that the Prisa-owned El Pais, Spain’s most influential newspaper, lost him the 1994 general elections.

Despite this, some sources claim the government greenlit the merger last week.

The Spanish government still holds a golden-share veto in Telefonica and it is hard to see Telefonica prexy Cesar Alierta announcing such a huge media deal without consulting very high echelons of government.

EU opposition could be stiffer. EU competition authorities stymied a cable TV joint venture announced by Prisa and Telefonica in 1996. A Spanish digital TV merger has long been in the cards. “Estimations for digital TV may have been over-optimistic in Spain. They didn’t factor in the boom in DVD or free TV fuelled by reality shows and soccer,” says Admira managing director Ele Juarez.

Sogecable and Via faced further competition from digital terrestrial operator Quiero, which is now shuttering.

If it comes off, the merger can be seen as a victory for Prisa: It ties it in to Telefonica, the Spanish-speaking world’s most powerful promoter of ADSL broadband and, potentially, video-on-demand.

Linked, Sogecable and Via will be able to re-negotiate movie and soccer rights downwards. Crucially, pay TV league rights must be renewed from the end of the 2002-03 season.

For Admira, Telefonica’s beleaguered media subsid, the merger looks like a Houdini act.

Sogecable posted $2.5 million net profits last year, thanks to Canal Plus Espana and multi studio deals for CSD. In 2001 Via Digital saw $303.3 million in net losses. Lacking a premium channel and event programming beyond soccer, its future looked dismal.

And Telefonica has done little recently to suggest it has the vision, know-how or stomach to dig Admira out of its debt by commercial strategies other than a digital merger.

Telefonica first-quarter net profits look set to drop to some $45 million. It needs to plug Via’s drain.

It now remains to be seen if the EU will give Admira a second life or leave it and Via dead on their feet.