UPDATE: Telefonica, China Unicom Strengthen Partnership

MADRID (Dow Jones)-Spain's Telefonica SA (TEF) said Sunday that it will widen its strategic partnership with China Unicom (Hong Kong) Ltd. (CHU), with each company investing $500 million to increase their cross shareholdings.

Telefonica said in a filing with regulators that it will raise its stake in China Unicom to 9.7%, while the Chinese telecommunications company will increase its ownership in the Spanish company to 1.37%. Telefonica said last summer it intended to increase its stake in China Unicom to around 10%, but hadn't said when it would do so.

The Spanish telecoms giant said the strategic agreement and investment plan is unprecedented in China´s coveted market, which still has low penetration rates and high growth potential.

The expanded agreement also comes at a time at a time when Telefonica's mature Spanish home market is suffering from the lingering impact of a severe contraction and record unemployment.

Spain's No. 1 telecommunications firm by market value has expanded aggressively abroad, from fast-growing Latin American states and promising economies such as China, to cutthroat, mature European markets like the U.K.

The Spanish company currently has 277.7 million clients worldwide, up from 68.2 million in 2000. China Unicom, meanwhile, is the world's No. 4 telecoms firm by clients, with 310 million customers. Their combined customer base equates to about 10% of the world's population, Telefonica's Chairman Cesar Alierta said in a statement.

"Every six months, the Chinese (telecommunications) market grows at a rate that equals Spain's population," adding 9 million customers on a monthly basis, Telefonica said. The Chinese telecoms market is expected to have one billion users next year, it added.

The Spanish company is the main foreign partner of China Unicom. It took a minority stake through a strategic alliance with what today is China Unicom in 2005. The two companies cooperate on mobile phone service platforms, equipment purchase, corporate telecommunications services and technology.

Under the new agreement, China Unicom will now have board representation at Telefonica. Alierta already seats on China Unicom's board and goes to China on a monthly basis.

To boost their cross shareholdings, Telefonica will sell to the Chinese firm more than 21.8 million shares held in treasury at EUR17.16 each, representing the average price of the past 30 trading days. The deal will boost China Unicom's total investment in Telefonica to $1.5 billion.

Telefonica, in turn, will buy China Unicom shares through market transactions over the next nine months.

Last September, by contrast, Vodafone Group PLC (VOD), the world's biggest mobile operator, sold its stake in China Mobile Ltd. (CHL) for GBP4.3 billion before tax and transaction costs, as part of Chief Executive Vittorio Colao's strategy to shed minority investments and return cash to shareholders.

Telefonica shares closed Friday in Madrid at EUR18.37, valuing the company at EUR83.84 billion.

-By Santiago Perez, Dow Jones Newswires; (34) 618 528 681; santiago.perez@dowjones.com

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