Spanish phone operator Telefónica plans to increase its Chinese presence with $1.6 billion investment

With mobile phone markets becoming saturated in the developed nations of America and Europe, phone companies are increasingly looking towards the developing states of Asia and Africa. And nowhere is this interest more frenzied than in China and India – the world's largest and fastest-growing wireless markets respectively.

Now, Telefónica SA, Europe's second-largest phone company, has announced that it will pay as much as €1.1 billion ($1.6 billion) to boost its stake in China Netcom Group Corp. (Hong Kong) Ltd. and expand in China.

The telecom giant said in a filing with Spanish regulators that it will own 5.5 per cent of the company resulting from the merger of China Netcom Group Corp. (Hong Kong) Ltd. and China Unicom Ltd. Spain-based Telefónica, which has been expanding aggressively in Latin America and Europe, said that through the deal it will become the combined company's biggest private shareholder. See: China Unicom to buy fixed line operator Netcom for $23.9 billion in stock

China Unicom, a wireless carrier, is acquiring fixed-line operator China Netcom in an all-stock deal as part of a government-directed industry restructuring unveiled in May. The restructuring entails merging six of the country's state-owned mobile-phone and fixed-line operators into three nationwide carriers offering fixed-line and wireless services, instead of dividing coverage in terms of region or type of service. See: China restructures its telecommunications infrastructure into three giant companies

Earlier this week, José María Álvarez-Pallete, Telefónica's head of Latin America and a China Netcom director, said Telefónica aims to become the combined company's strategic partner, offering telecommunications and international know-how.

Telefónica already owns about 5 per cent of China Netcom, but has long wanted to increase this and bolster its position in the world's biggest mobile market. Telefónica has set its sights on China as the new frontier of its emerging markets strategy, after aggressive expansion in Latin America. Spain, its home market, is undergoing a sharp economic downturn.

In a statement to the Madrid stock exchange yesterday, Telefónica said that it would buy two tranches of shares in China Netcom, totaling 5.7 per cent of the company, from AllianceBernstein, the US fund manager.

In the first part of the deal, Telefónica will acquire 2.71 per cent of China Netcom for about €368 million, bringing its stake in that company to 9.91 per cent. In the second step, it will buy shares in the new company resulting from the merger of China Netcom and China Unicom, ending up with a stake of 5.5 per cent in the enlarged company. The second purchase price is expected to range between €392 million and €434 million.