Telefonica bolsters China presence with Netcom buy

MADRID/HONG KONG (Reuters) - Spain's Telefonica (TEF.MC) said on Thursday it would raise its stake in China Netcom (0906.HK) by 5.75 percent, bolstering its presence in the world's largest telecoms market.

Telefonica will pay up to 802 million euros ($1.2 billion) to buy the stake from U.S.-based fund manager Alliance Bernstein Holdings LP (AB.N), the telecoms company said in a statement, taking its holding in China Netcom to over 12 percent.

This in turn will give it a stake of around 5.5 percent in the new company resulting from the imminent merger of China Netcom and China Unicom (0762.HK), making it the leading private shareholder in the new entity.

China unveiled a long-awaited plan to shake up the industry on May 24, orchestrating acquisitions to form three full-service carriers: China Mobile (0941.HK)(CHL.N), China Telecom (0728.HK)(CHA.N) and the Unicom-Netcom entity.

Analysts say the newly enlarged Chinese operators need the expertise and technology that foreign firms can bring, although one said Telefonica was the main beneficiary of this deal.

"The holding by Telefonica mainly benefits Telefonica more than it benefits the new group," said Steven Liu, analyst at DBS Vickers. "China is a growth market."

Another analyst said the move was part of Telefonica's push to diversify its holdings.

"We believe Telefonica's interest in Netcom is part of a broader strategic push by Spain to strengthen ties with China and diversify away from their traditional international focus on Latin America," said Tucker Grinnan, analyst at HSBC.

Growth is slowing in Telefonica's home market Spain, which accounts for just over a third of sales, as the country undergoes a sharp economic downturn.

Although the market had widely expected Telefonica's move, investors took the opportunity to buy up Netcom stock which had been oversold, pushing the shares up almost 6 percent before receding to trade up 2 percent at HK$ 18.6 at 4:43 a.m. EDT.

Netcom shares had fallen to their lowest levels in more than a year on Chinese restructuring uncertainties. Telefonica was steady, up just 0.23 percent at 17.36 euros.

Telefonica said it would buy the shares in two phases, investing around 368 million euros initially to bring its stake in China Netcom up to 9.9 percent.

It will then invest between 392 million and 434 million euros in a second tranche.

Telefonica said its total investment in the Chinese company has been around 1.4 billion euros.

(Additional reporting by Robert Hetz; Writing by Sonya Dowsett; Editing by Jason Neely)