Telefonica steps back from China as debts mount

Spanish network giant Telefonica revealed just how much financial trouble it may be in after it was forced to sell half of its shares in China Unicom back to China’s number two telco.

Telefonica will remain a major shareholder in the Chinese company with a 5.01 per cent stake, but is set to cash in on 4.56 per cent to the tune of around HK$11bn (£911m), according to a filing with the Hong Kong Stock Exchange on Sunday.

“The deal reflects [Telefonica's] ... decision to manage pro-actively its asset portfolio and will allow Telefonica to increase its financial flexibility," the firm said in a statement.

Telefonica remains committed to its partnership with China Unicom and won’t sell any further shares for at least 12 months, the filing said.

However, the future remains far from bright for O2’s parent company. Its Q1 earnings fell 54 per cent year-on-year to €748m (£607m), while revenue stayed virtually the same at €15.5bn (£12.6bn).

As if that wasn’t bad enough, debt ratings agency Standard & Poor's reduced its rankings for the firm last month, from BBB+ to BBB, just two steps above “junk bond”.

The move to reduce its China Unicom stake is another indicator of just how difficult it is for western players to survive and thrive with partnerships in the People’s Republic, despite the huge potential of the fast-growing market.

Vodafone pulled out of its tie-up with China Mobile in 2010, selling a 3.2 per cent stake for $6.5bn.

As the debt crisis continues in Europe, the state-run Chinese operators with their deep pockets and strong domestic businesses are now more likely to invest in partnerships with, or even acquisitions of, their foreign counterparts. ®