Germany's Mannesmann Arcor has emerged as the surprise buyer of rival long-distance provider Otelo Communications, paying utilities RWE and Veba 2.25 billion deutsch marks (€1.15 billion) for the firm.

The deal strengthens Arcor parent Mannesmann, which is already a formidable player in Germany's deregulated telecoms markets and a burgeoning force in continental Europe.

It also marks a retreat for the two utilities, which had hoped growth in telecoms would offset price declines as Europe lifts barriers to competition among electric companies.

The announcement also dashed speculation that newly-listed telecoms group Debitel was close to winning the bidding for Otelo. Earlier, Mobilcom, another rising German carrier, said it had broken off talks with RWE and Veba.

Mannesmann Arcor plans to run Otelo as a separate unit. A young company, founded to exploit the full deregulation of Germany's telecoms market in January 1998, Otelo does not expect to break even until 2002, but it brings several strengths. These include 1,000 large business customers, such as Dresdner Bank and the television company, RTL, as well as 400,000 private customers. With the acquisition, Arcor will become the clear number two long-distance provider behind Deutsche Telekom.

"In this case, one and one equals more than two," said Harald Stober, Mannesmann Arcor chief executive. "With two fixed-line companies, we can significantly speed up our planned growth and further enhance our market position as the leading private competitor."

In addition to Arcor, Mannesmann already owns Germany's top cellular group, Mannesmann Mobilfunk, and holds stakes in rising Italian mobile carrier Omnitel Pronto Italia and French mobile group SFR.

It also holds stakes in fixed networks in France and Italy, and is building a cross-border network to link them with its German operations. Otelo has links to Belgium, Denmark, Luxembourg, Switzerland and Britain.

Once famous for its steel and engineering operations, Dusseldorf-based Mannesmann has transformed itself in the 1990s by selling almost 40 businesses and moving aggressively into telecoms, which have accounted for most of the company's growth in the past two years.

Mannesmann's expansion could take a further leap forward this year if Olivetti, the Italian group, succeeds in its bid to buy Telecom Italia. Olivetti's takeover plan would involve selling its stakes in Italy's second-largest mobile and fixed-line telephone operations to Mannesmann for DM15 billion.