By Christopher Bjork 

MADRID--Spanish telecommunications giant Telefónica SA thought it was about to seal the acquisition of Mexican cellphone operator Grupo Iusacell SA de CV from two of the country's billionaires when a Twitter message from one of them spoiled the deal.

"Telefónica says it wants to buy Grupo Salinas's stake in Iusacell. It is not for sale," Ricardo Salinas, president of the family-owned Grupo Salinas wrote to his more than 300,000 followers in July, marking a rare upset in the Madrid-based operator's push to gain more scale in fewer markets.

This month Mr. Salinas sold Iusacell to AT&T Inc. for $2.5 billion, more than the Spanish company had offered. Telefónica was left with a business that remains a distant No. 2 in a market where it wants to be a leading player.

Over the past year, the Spanish company has sorted out similar situations by rejiggering parts of its empire, which spans most of Latin America and three of the five largest economies in Europe. Telefónica has raised its bets on Brazil and Germany by spending $20 billion on large acquisitions in those countries. It has retreated from markets where it lacked scale, such as Ireland and the Czech Republic, and sold most of its shares in a Chinese operator.

Telefónica declined a request for an interview on its asset-shuffling strategy, which appeared to lie behind Monday's announcement that it is in talks to sell its U.K. wireless unit O2 to BT PLC, the former British telephone monopoly. In a crowded U.K. market where rivals are beginning to offer consumers packages of high-speed Internet, cellphone connections and digital television, Telefónica's O2 may struggle to compete unless it sells out or bulks up.

"It's the Europe-wide trend, going from having breadth to more scale in fewer markets," said Jonathan Dann, telecom analyst with Royal Bank of Canada. Larger rival Vodafone Group PLC, for instance, sold its stake in Verizon Wireless in the U.S. and expanded its operations in Germany and Spain. Mr. Dann said Telefónica would likely to use proceeds from a U.K. sale to strengthen its position in Latin America's largest markets.

Analysts value Telefónica's U.K. business at roughly $14 billion. BT is also holding talks with a second wireless operator, EE, a joint venture between Orange SA and Deutsche Telekom AG, and has cautioned that talks with both wireless operators are at an early stage.

Teaming up with BT, which owns much of the fixed-line infrastructure in the U.K. but has no cellphone service, would be a good fit for both firms and may free up cash that Telefónica could use to lower its debt load, said Isaac Chebar, a fund manager with DNCA Finance SA, which owns shares in Telefónica and several other telecommunications firms.

Telefónica took a back seat during a recent merger frenzy in Spain that reduced the number of network operators to three from five. While sales in its home market have declined in recent years, the company expects them to grow next year. The former Spanish monopoly has laid fiber-optic cables across the country, allowing it to serve growing demand for bundled products. It recently acquired the country's leading pay-TV operator, a move that will further boost its digital offering.

Telefónica's expansion in Brazil and Germany ended a period of caution and debt reduction. The firm had saddled itself with more than EUR50 billion ($62.2 billion) in debt to fund a buying spree during the boom years before the eurozone's 2008 recession and subsequent debt crisis sent borrowing costs soaring. Telefónica bought O2 in 2005 for GBP17.7 billion ($27.8 billion).

While Telefónica has made progress paying off loans, its debt remains firmly on investors' minds.

"I would certainly prefer that Telefónica sell in the U.K., as long as it obtains a good price," said Norbert Janisch, a fund manager at Austria's Raiffeisen Capital Management, which has EUR30 billion in assets under management, including EUR7 million worth of Telefónica stock. "If they were to stay, they would really have to invest a lot," he said. "I'd prefer that they reduce debts." Analysts say Telefónica still has work to do in Latin America, which accounted for slightly more than half its EUR13 billion revenue in the third quarter. It agreed this year to acquire Brazilian broadband provider GVT, allowing Brazil to surpass Spain as Telefónica's biggest market.

Analysts expect the number of Brazilian cellphone operators to shrink further, from four to three, and that Telefónica will play a role.

The company may have fewer options in Mexico, a market where Telefónica has struggled to gain sufficient scale since it first invested the country in 2001. Mexico's telecommunication industry is dominated by billionaire Carlos Slim's América Móvil, which controls about 70% of the market.

América Móvil decided this year to sell assets in order to cut its market share to less than 50%, in order to avoid stiff regulations such as forced network-sharing and the elimination of charges to connect incoming mobile calls from competing networks.

Telefónica's chief operating officer, José María Álvarez, said this month that the regulatory changes in Mexico "provide a much more level playing field" that gives the company a "much more positive outlook" there.

But bankers involved in the planned sale of América Móvil assets say AT&T is the leading contender.

John Stankey, AT&T's chief strategy officer, has said his company will be "very aggressive" in going after América Móvil customers, a strategy that would force Telefónica to spend more to grow in Mexico.

Santiago Pérez and Anthony Harrup in Mexico City contributed to this article.

Write to Christopher Bjork at christopher.bjork@wsj.com

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