Telefonica to enlarge holding in Netcom before industry shuffle

PUBLISHED : Friday, 05 September, 2008, 12:00am
UPDATED : Friday, 05 September, 2008, 12:00am

Telefonica, the second-largest telephone operator in Europe, will pay up to Euro802 million (HK$9.09 billion) to maintain its stake in China Netcom Group Corp, a mainland fixed-line operator that is merging with mobile operator China Unicom.

Telefonica, which owns about 5 per cent of Netcom, had reached an agreement with asset management firm AllianceBernstein to acquire an additional 5.74 per cent stake in Netcom, the company said in a statement filed with the Spanish stock exchange.

The acquisition will be in two tranches. Telefonica will immediately pay Euro368 million for a 2.71 per cent stake in Netcom.

It will acquire the remaining 3.03 per cent stake, valued at between Euro392 million and Euro434 million, subject to the completion of the merger between the two mainland telecommunications carriers.

The two moves will allow Telefonica to boost its stake in Netcom to as much as 12.93 per cent, although it will be diluted to about 5.5 per cent following the completion of the merger. Telefonica bought a stake of 2.22 per cent in January but the deal is still waiting for approval.

Unicom said in June it intended to pay up to HK$182.7 billion to buy out Netcom in a cash and share deal.

Unicom will swap one Netcom share for every 1.508 of its own shares, resulting in 10.1 billion new Unicom shares being issued.

The takeover will create a new integrated telephone company with businesses ranging from fixed-line to mobile.

Shares of Netcom yesterday rose as much as 5.91 per cent and Unicom 5.36 per cent, after the announcement of the proposed stake acquisition by Telefonica.

A Unicom spokesman said there was no further information to announce, while a spokesman for Netcom could not be reached.

'The deal is only beneficial to Telefonica but neutral to China Unicom and China Netcom,' said DBS Vickers analyst Steven Liu.

'Telefonica will enjoy a first-mover advantage and surely not lose any money in the deal as China is a fast-growing market. Many multinational telecommunications companies have tried to enter the mainland's market but failed.'

Mr Liu said the combined Unicom-Netcom would not use Telefonica's network or technology to develop overseas markets as it had to spend some time and cash on integration and consolidation after the merger.

'The deal, which showed Telefonica's confidence in the shares of China Unicom and China Netcom, will help support the share prices in the short term,' said Michael Wong Man-sek, a research director at Hantec Investment International.

'However, the positive effect may not last long as market sentiment is very weak.'

Mr Wong said shares of Unicom and Netcom would enjoy stronger support if the two companies announced development plans with synergy effects.