telefonica-china-unicom.jpgWhy is Telefónica expanding its relationship with China Unicom? History shows that global telecoms alliances rarely produce anything of substance.

Remember Unisource? Global One? Thought not. WorldCom is remembered, but for all the wrong reasons — it was the centre of a $3.8bn fraud.

Despite the poor precedents, the Spanish telco, which is the world's third largest by market capitalisation, has filed to increase its holding in Chinese operator China Unicom to just above 8 % from 5.4% it currently has.

More significantly, perhaps, the Chinese company will take a 0.9% stake in Telefónica — the first time a Chinese telco has taken a stake in a mainstream European operator. The share swap is valued at $1bn.

And what are the benefits? According to a joint statement, Unicom hopes to use its strengthening alliance with Telefónica to enter Latin America, where China is forging relationships to secure supplies of metals and hydrocarbons.

For its part, Telefónica is keen to diversify outside the mature domestic market, where recession has hit demand. But there are precious few Spanish multinationals operating in China that could benefit from the duo's “one stop shop” approach — the traditional justification for these global alliances.

More pragmatically, Telefónica and Unicom also agreed to co-operate on the purchasing of handsets and phone equipment, roaming, and the provision of network services.

Telefónica initially invested in China Netcom in 2005. The Chinese fixed-line carrier was acquired by Unicom last year in a share-only deal as part of a government-led reorganisation of the domestic phone industry.

The Spanish carrier's stake in Unicom following the latest increase will be more than double the stake that is held by South Korea's SK Telecom.

A decade ago, global alliances between national carriers were all the rage as telecoms markets around the world felt the winds of liberalisation and deregulation.

But the alliances rarely produced any tangible benefits for business customers — the supposed beneficiaries — and in recent years telcos have invariably chosen to get bigger through acquisitions.

Because of their size and their flag-carrier status, there's not much chance of either Telefónica or China Unicom being acquired — by the other party or by anyone else. So presumably the two have decided the only realistic way to expand in each other's markets is via a share swap.


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