Telefónica and China Unicom Increase Reciprocal Investment

Telefónica and China Unicom have agreed to up their investments in each other’s business by the equivalent of US$500 million. The investments will increase Telefónica’s stake in China Unicom to 9.7%, while China Unicom’s stake in Telefónica will rise to 1.37%. The agreement also includes deepening their co-operation in the areas of procurement, mobile service platforms, services to multi-national corporations, wholesale carriers, roaming, and technology. As part of the agreement, China Unicom is able to nominate a member of the board at Telefónica, subject to approval from Telefónica’s shareholders; under the previous deal Telefónica’s chairman and chief executive, Cesareo Alierta, had a seat on China Unicom’s board of directors. The original deal, signed in 2009, included reciprocal investments of US$1 billion, which gave Telefónica a shareholding of approximately 8.06%, while China Unicom had a 0.87% stake in Telefónica (see China: 7 September 2009: China Unicom, Telefónica Deepen Strategic Alliance in Share Swap).

Outlook and Implications

• Deal Provides Further Exposure to China: China Unicom is China’s second-largest mobile operator with 167 million mobile subscribers at the end of December 2010. Telefónica originally invested in China Netcom and became a shareholder in China Unicom following the merger of China Netcom and China Unicom in January 2009. The deal gives Telefónica further exposure to the fast-growing Chinese market, which reached 40 million 3G subscribers in January 2011 (see China: 4 January 2011: China Hits 40 Mil. 3G Users). With the mobile penetration rate at under 60%, there is still ample room for growth in the Chinese market.

• Further Investments in Emerging Markets: The deal highlights Telefónica’s commitment to emerging markets: in January 2011 it announced that it planned on investing US$700 million into its Chilean operations (see Chile: 10 January 2011: Telefónica to Invest US$700 Mil. in Chile in 2011). In July 2010 Telefónica closed a deal with Portugal Telecom to give Telefónica a 60% stake in Brazilian operator Vivo (see Brazil: 28 July 2010: Telefónica and PT Reach Agreement on Vivo Sale).

• Emerging Markets Driving Growth: In its third-quarter 2010 results, Latin America was the major driver of growth for Telefónica. Some 42% of its revenues came from its Latin American operations in the nine months to September 2010, while operating income from Latin America was up 107% year-on-year (y/y) to reach 7.95 billion euro (US$10.8 billion). By way of comparison, revenues for its home Spanish market were down 4.2%; operating income fell by 8.0% for the same period (see World: Spain: 11 November 2010: Telefónica Sees Q3 Revenue Up 7%, Receives Green Light with Telecinco for Digital+ Purchase). While its Spanish operations continue to struggle, Telefónica will continue to invest in higher-growth emerging markets.