Telefonica Plans Unicom Sale, Reduces China Presence

China Unicom said in an announcement today that its second-largest shareholder, Telefonica, plans to sell more than a billion shares of the company’s stock back to the Chinese carrier’s parent company. The move comes just 17 months after the two companies increased their mutual holdings of each others stock, and probably reflects the shifts in the macroeconomic environment since then.

Telefonica will sell a block of 1.07B shares, or 4.56% of the company, to China United Network Communications Group Company Limited at a price of HK$10.21. Telefonica will still own just over 5% of China Unicom after the deal closes, while China United’s ownership will rise to just over 76.5%. Telefonica has also agreed not to sell any further China Unicom shares for the next year.

The deal will raise €1.129B in cash for Telefonica, which the company said it intends to use to improve its balance sheet and improve its financial flexibility. Like other European-based telecoms, Telefonica has felt the effects of the continent’s economic difficulties.

However, I can’t help but wonder if this particular move has less to do with Telefonica’s balance sheet and more to do with growing fears that China’s economic growth trend is itself at risk, if not already broken.  If it is, then Chinese consumer spending on telecommunications would be a wildcard, as this sector’s sensitivity to an economic pullback has never really been tested in the Chinese consumer market.  Telefonica may in part simply want to reduce its exposure to economic turmoil on yet another front.

But the two companies will continue their strategic relationship, regardless. Telefonica will remain China Unicom’s second largest shareholder, while China Unicom also will continue to own a meaningful slice of Telefonica.  A few cards will simply come off the table and go back into the deck, perhaps for a later hand.

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Categories: ILECs, PTTs · Mergers and Acquisitions