Telefonica, Unicom Expand Ties

Spanish Telecom giant Telefonica (TEF - Analyst Report) and the second-largest Chinese carrier China Unicom (CHU - Analyst Report) reportedly expanded their strategic alliance recently. The companies joined forces to collaborate in various areas including R&D, roaming, joint procurement of equipments, infrastructural development, joint development of mobile services and providing services to multinational clients.

The companies also announced their mutual investment plan to buy $1 billion worth of each other’s stock. Under terms of the deal, Telefonica will buy 693.91 million shares in China Unicom at HK$11.17 each while China Unicom will buy 40.73 million shares of Telefonica at 17.24 Euros each.

The deal, expected to close in November, will increase Telefonica’s stake in China Unicom to 8.06% from 5.38%, further strengthening its position as the largest overseas investor in the entity. On the other hand, China Unicom will acquire about 0.88% of Telefonica, making it the first Chinese operator to invest in a leading European telecom company.

This extended collaboration is expected to offer significant technological and operational synergies. Both companies operate the widely adopted WCDMA-based 3G wireless network which will enable them to jointly develop WCDMA based services. They can also collaborate in future upgrades such as development of 4G technology. Moreover, the agreement strengthens their market coverage, providing them a combined subscriber base of 550 million, or 10% of the global population.

Telefonica is increasingly focused on expanding in additional emerging markets as it contends with a mature domestic market along with weak economic conditions in its key markets. The company aims to increase its foothold in China, the home to approximately 600 million mobile users. China represents Telefonica’s biggest opportunity outside its core European and Latin American markets.

Telefonica entered China in 2005 through its investment in China Netcom, which was acquired by China Unicom early this year after restructuring of the Chinese telecom industry. It surpassed South Korea’s SK Telecom (SKM - Analyst Report) as the largest overseas shareholder of the consolidated China Unicom with 5.38% share. The Spanish operator eventually plans to raise this stake to 10%, to bolster its foothold in the lucrative Chinese market. Its key rival Vodafone (VOD - Analyst Report) has 3.3% stake in China Mobile (CHL - Snapshot Report).

The deal also benefits China Unicom, providing the carrier with opportunities to enter the Latin American market where Telefonica has a significant presence. Moreover, it can leverage Telefonica’s vast 3G experience as it prepares to commercially launch its 3G WCDMA network during the third quarter.

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