In another company hard hit by the European financial crisis, Spain’s Telefonica S.A. (NYSE:TEF) announced that it will sell its 4.56 percent stake in China Unicom (NYSE: CHU) (HKG:0762) to reduce its debt.
The deal has Telefonica selling the company’s one billion-plus shares (traded on HKG) back for $1.1 billion euros ($1.4 billion). The company has also agreed not to sell any additional China Unicom shares for 12 months, reported Bloomberg.
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In a corporate statement, the sale has been done to will help improve the company’s “financial flexibility.”
In response to news, Paul Marsch, an analyst at Berenberg Bank in London said via Bloomberg, “It reflects how the board is finally recognizing the seriousness of the concern of credit markets over Telefonica’s balance sheet . This is the right step but you can’t look at this in isolation.”
Marsch has a “Sell” rating on Telefonica’s stock.
The company has $70 billion in outstanding debt and just last month it announced plans for a share offering in its German subsidiary, O2 Germany, to raise capital. Telefonica is also looking at a similar share sale in its 14 South and Central America businesses.
It has been facing tough times and in the first quarter, Telefonica saw a 54 percent profit decline to 748 million euros. This came on a 6.8 percent drop in Spanish customers.
The company, which is the largest European telecommunications operator by revenue according to The New York Times, has been participating since 2005 in the Chinese mobile phone market with China Unicom. By January 2011, Telefonica held a 9.7 stake in the company.
After this sale, Telefónica will still have a five percent share in China Unicom, which is the second-biggest mobile phone operator in the country behind China Mobile.
The deal is expected to close by the end of July.
The market took the news well with Telefonica shares increasing 4.9 percent at 9:04 a.m. Madrid time. Through June 8, the stock has declined 27 percent this year. Its market value is now 44.5 billion euros. For China Unicom, it rose 5.6 percent to HK$10.96 in Hong Kong trading; this represented the greatest increase since October 2011.
Is this the beginning of China’s ‘bailout’ of Europe?