Telefonica To Up Stake In China Netcom To 9.9% - Source

MADRID -(Dow Jones)- Telefonica has signed an agreement that will allow it to raise its stake in the Chinese telecommunications operator China Netcom Group Corp. to 9.9% from 5%, a person close to the matter said Monday.

Telefonica, the largest telecommunications company in Spain and Latin America, will also receive the right to appoint a second member to China Netcom's board of directors, the person said.

Telefonica has also agreed to set a strategic partnership with the Chinese telecommunications equipment maker Huawei Technologies Co., the person said.

The agreement will "most likely" focus on the purchase of Huawei equipment by Telefonica, for both its Spanish and Latin American operations.

Earlier this year, another person told Dow Jones Newswires that Huawei officials had talks in Madrid with representatives from Telefonica's wireless arm Telefonica Moviles SA.

The talks focused on third-generation network equipment, especially base stations, according to this person. He added that Huawei offered significant price discounts for equipment compared with the company's current suppliers. However, those talks didn't result in any agreement.

Telefonica has signed some contracts with Huawei for its Latin American operations, but its main networks suppliers to date are Siemens AG, Telefon AB LM Ericsson and France's Alcatel SA.

Both Telefonica agreements coincide with the current visit to Madrid of the Chinese president Hu Jintao. Hu met Monday with Spain's prime minister Jose Luis Rodriguez Zapatero, and signed several bilateral agreements seeking to expand trade between the two countries.

Earlier Monday, Spanish daily Expansion said Telefonica planned to sign a strategic agreement with China Netcom to double its stake in the company.

Telefonica and China Netcom already signed in July a memorandum of understanding to establish a strategic alliance.

Telefonica has recently built up a 5% stake in state-owned, Hong Kong-listed China Netcom, and appointed Jose Maria Alvarez-Pallete, chairman of its Latin American unit, to the board of directors.

Telefonica spent EUR240 million in June to buy an initial 3% stake in China Netcom, and then added an further 2% stake in the open market, for an undisclosed amount.

China Netcom is China's second-largest fixed-line operator.

A Telefonica spokesman declined to comment.

Company Web site: http://www.telefonica.com

-By David Roman, Dow Jones Newswires; +34 913 958 125; david.roman@dowjones.com

(END) Dow Jones Newswires "

Posted to the site on 14th November 2005