Spain’s incumbent telecom carrier Telefonica (TEF) is planning to expand its stake in China Unicom (CHU), the second-largest Chinese wireless carrier. The Spanish telecom giant expects to gradually increase its share in the Chinese company to further boost its foothold in the world’s largest mobile market.

The companies concluded a $1 billion stake purchase in each other’s stock in October 2009. Per the agreement, Telefonica bought roughly 694 million shares in China Unicom while China Unicom purchased 40.7 million Telefonica shares. With the completion of this share-swap transaction, Telefonica’s stake in China Unicom increased to 8.06% from 5.38%. Telefonica plans to eventually expand its stake to 10%.

Additional stake purchase in China Unicom has further consolidated Telefonica’s position as the largest overseas investor in the Chinese company. South Korea’s largest wireless operator SK Telecom (SKM), which was the second-largest investor in China Unicom with a 3.8% share for three years, divested its stake back to the Chinese operator in November 2009 for roughly $1.3 billion.

Telefonica is increasingly focused on expanding into additional emerging markets as it contends with a matured domestic market along with weak economic conditions in its key markets. China, the home to approximately 722 million mobile users, represents Telefonica’s biggest opportunity outside its core European and Latin American markets.

Telefonica entered China in 2005 through its investment in fixed-line operator China Netcom, which was acquired by China Unicom in early 2009 following the restructuring of the Chinese telecom industry in late 2008. Telefonica’s major rival Vodafone (VOD) has a 3.3% stake in China Mobile (CHL), China’s largest wireless carrier.

The expanding collaboration between Telefonica and China Unicom benefits both operators in the form of significant technological and operational synergies. Both these carriers operate their 3G networks based on the popular WCDMA technology. This enables them to jointly develop WCDMA based wireless services. Moreover, the companies may also collaborate for future technology upgrades such as the development of 4G technology.

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