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Telefónica Boosts Chinese Ties

Spanish incumbent carrier Telefónica SA has been busy forging closer ties with Chinese telecom firms this week, striking alliances with operator China Netcom Corp. Ltd. (NYSE: CN; Hong Kong: 0906), in which it already owns a stake, and equipment manufacturer Huawei Technologies Co. Ltd.

Huawei has confirmed that Telefónica will resell its 3G mobile devices and home gateway devices to its customers in Spain and Latin America. The resale deal follows Huawei's agreement with German powerhouse Deutsche Telekom AG (NYSE: DT) announced earlier this year, though that is focused on enterprise equipment. (See Huawei Lands Deutsche Deal, Huawei Delivers Home Gateway, and Huawei Presents at 3G World.)

It's also another step forward for Huawei in Europe, where it's aiming to triple its sales. The vendor has scored a number of notable successes in the region this year, most notably at BT Group plc (NYSE: BT; London: BTA) and KPN Telecom NV (NYSE: KPN). (See Huawei Plans to Triple Euro Business, Huawei Lands NGN Deal, Huawei Doubles Up at KPN, Tiscali UK Unbundles With Huawei, Huawei Picked for BT's 21CN, Huawei Scores Euro Win, and Huawei Claims Another Euro Scalp.)

Telefónica has also cemented its relationship with Chinese operator Netcom, in which it acquired a 5 percent stake earlier this year. The Spanish carrier will increase that stake to 9.9 percent, a move that will allow it to nominate a second director onto Netcom's managing board, according to an announcement made by Netcom. (See Eurobites: Big Guns Fire Salvos.)

Doubling its stake in Netcom will cost Telefónica more than $500 million based on the Chinese carrier's current share price, according to reports in the Chinese media. No timescale has been given for the increase in the Spanish carrier's stake.

The Spanish carrier believes the Chinese market has great potential to provide new international business, and that Netcom is a good investment for the future, given the expected growth in the Chinese telecom services market. Research firm IDC believes the market will grow from $56 billion in 2004 to be worth more than $92 billion in 2009.

As part of its new deal with Netcom, Telefónica has also entered into a "Strategic Alliance Agreement" that will come into effect once Telefónica has boosted its stake in Netcom. The agreement follows the signing of a "memorandum of understanding" in July, which outlined areas where the two could cooperate. (See China Netcom, Telefónica Cosy Up.)

Now, in a deal timed to coincide with an official state visit to Spain by Chinese President Hu Jintao, the duo plan to cooperate in a number of services markets, including: international voice, IP peering, and MPLS-based IP VPNs; call center services for the 2008 Olympics, to be held in Beijing, and a joint call center that will provide outsourced services to customers; and mobile roaming services.

The two carriers also plan to co-develop services and business plans for the Chinese market, exchange senior management for six-month periods, jointly purchase telecom equipment, and exchange knowledge and experience. China Netcom is particularly interested in learning about services for mid-sized and small businesses, and IPTV. The Spanish carrier now has more than 120,000 customers for its IPTV service, Imagenio. (See Acquisitions Boost Telefónica in Q3.)

Telefónica has been increasingly active in the mergers and acquisitions market this year as it seeks to lessen its dependence on the Spanish and Latin American markets. As well as investing in China Netcom, it has acquired Central European incumbent carrier Cesky Telecom a.s. and is in the process of buying U.K. mobile operator O2 plc (NYSE/London: OOM). (See Telefonica Buys Cesky Telecom and Telefónica Swoops In on O2.)

— Ray Le Maistre, International News Editor, Light Reading

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