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Telefonica, MegaFon Ink Deal

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Struggling telecom giant Telefonica SA (TEF - Free Report) has signed a strategic deal with second-largest Russian telecom operator, MegaFon. The deal is aimed at reducing equipment cost via joint purchases. The two companies will also exchange technical know-how. However, none of the companies have disclosed any specific cost reduction amount from the deal.

Per the new agreement, the two telcos will enter a joint roaming service that will allow Telefonica to provide services to its multi-national corporate clients using MegaFon’s network, while the latter will also gain access to Telefonica’s extensive network.

Both companies also stated that their subsidiaries, Megalabs and Telefonica digital, could work together in the future to explore business opportunities in areas like machine-to-machine and cloud services.

This agreement is part of Telefonica’s partner program, which is aimed at helping the smaller service providers to benefit from the Spanish giant’s huge presence in Europe and Latin America. Its large size attracts favorable rates from suppliers. Telefonica has already added China Unicom Limited (CHU - Free Report) ,Telecom Italia S.P.A. (TI - Free Report) and Etisalat as its partners.

Recently, Telefonica reported mixed financial results in the first quarter of 2013, where the company’s earnings beat the Zacks Consensus Estimate, while the top line failed to beat. The company faced revenue declines in most of its top European markets as the ongoing macroeconomic crisis in the region continues to hurt the company.

Nevertheless, the major concern for TEF is its mounting debt, which currently stands at $68.43 billion. Telefonica wants to reduce its debt by approximately $5 billion by the end of 2013. We believe that though this strategic deal will not contribute to its debt reduction effort, it will diversify its operational presence.

Currently, Telefonica carries a Zacks Rank #3 (Hold). Another stock in the same industry which is worth considering is Telus Corp. (TU - Free Report) . Currently, the stock carries a Zacks Rank #2 (Buy).

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