* Ono board expected to discuss IPO, Vodafone offer
* Combined entity would be strong competitor for Telefonica
* Analysts, investors say potential deal to top 7 bln euros
By Julien Toyer and Kate Holton
MADRID/LONDON, Feb 11 (Reuters) - Directors of Spain's largest cable operator Ono met on Tuesday to weigh up whether they should accept a takeover offer from Britain's Vodafone or push ahead with their original plan to list the company on the stock market.
Ono, which sells fixed and mobile phone, TV and internet services, had been preparing for a 7 billion euro ($9.6 billion) stock market sale to capitalise on high investor interest in European cable firms when the British telecoms operator approached its private equity owners about a takeover.
A combined entity, building on Vodafone's strength in mobile services and Ono's position in broadband internet and TV packages would offer the biggest challenge yet to Spanish market leader and former monopoly Telefonica.
In response to a five-year economic downturn, Telefonica has turned the market ultra competitive by folding the four services of mobile, fixed-line, broadband and pay-TV into one cheaper offering for cash-strapped consumers.
With one offer already rejected as too low by Ono, Vodafone is now having to decide how much it is willing to pay for a company that is no longer growing.
All operators in Spain have slashed prices and reduced margins to keep customers and the prospect of a quick rebound following the end of the recession last year is weak, with more than a quarter of the workforce unemployed and consumer spending at record lows.
However a potential rival bidder, U.S.-based Liberty Global controlled by billionaire John Malone, has also expressed an interest.
Liberty went head to head with Vodafone over the purchase of Germany's Kabel Deutschland last year, eventually pushing up the price that the British group had to pay.
While people familiar with the matter have told Reuters that Ono believes it has an enterprise value of at least 7 billion euros ($9.5 billion), other sources have said that any buyer could have to pay up to 9 billion euros to convince Ono's owners to drop their plans for a stock market sale.
Vodafone, the world's second-largest mobile operator by subscribers, has made a second bid for Ono as part of its strategy to improve its networks following the $130 billion sale of its U.S. arm this month.
Chief Executive Vittorio Colao said on Monday the group could have the capacity to spend $30 billion to $40 billion on acquisitions in coming years and no deal should be too big if it makes strategic sense.
Although he declined to comment specifically on Ono, he said that his company is interested in Spain.
Two sources familiar with the matter said the board meeting was taking place in Madrid and could run late into the evening.
Vodafone's offer was not on the original schedule but the sources said it would be discussed.
Investment funds Providence Equity Partners, Thomas H. Lee Partners, CCMP Capital Advisors, and Quadrangle Capital own a controlling 54 percent of Ono, according to the company's website.
Ono has 13 board members, but the funds that control the 54 percent stake only hold five seats so they would have to convince at least another two board members to back a deal.
Other shareholders include General Electric Structured Finance, Canada's institutional fund La Caisse de depot et placement du Quebec and Spanish investment vehicles Val Telecomunicaciones and Multitel.
Several of them have suggested they would be ready to sell their stake.
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