Telefonica Nears Divorce With China Unicom

| About: Telefonica S.A. (TEF)

Summary

Telefonica is likely to finalize its divorce with China Unicom in the next two years.

The latest sale of shares was probably driven mostly by a need for cash.

I really don't understand why Telefonica didn't just completely dump the rest of its shares and finally end this marriage that never produced anything useful for either side.

Bottom line: Telefonica (NYSE:TEF) is likely to finalize its divorce with China Unicom (NYSE:CHU) in the next two years, following the latest halving of its holdings in its Chinese partner to 1 percent as part of a sell-down of non-core assets.

For some reason that's not completely clear to me, Spanish telco Telefonica doesn't want to admit that its decade-long marriage with China Unicom was a dud and is headed for divorce. That's my latest assessment, following reports that the Spanish carrier has further sold down its stake in its Chinese partner, leaving it with a miniscule 1 percent of Unicom's shares. This particular sale was probably driven mostly by a need for cash. But I really don't understand why Telefonica didn't just completely dump the rest of its shares and finally end this marriage that never produced anything useful for either side.

China's big three telcos are a pretty useless group in general, showing almost no ability to innovate and doing nothing except make profits from their highly protected home market. Unicom has been the least attractive of the trio due to constant management changes and lack of focus. That fact is apparent in its stock price, which has risen around 25 percent since it first formed its union with Telefonica in 2005. By comparison, the broader Hang Seng Index has risen by around twice that amount over the same period.

According to Reuters, Telefonica has raised about HK$2.82 billion ($364 million) by selling 362 million Unicom shares (English article, Chinese article). Telefonica previously owned 600 million Unicom shares, or about 2.5 percent of the company, so this latest sale brings its holdings down to just 1 percent of the Chinese carrier.

Telefonica priced the deal at an indicative range of HK$7.75 and HK$7.85 and ultimately sold the stake for HK$7.80 per share, representing a discount of about 2.2 percent to the company's Friday close. The Reuters report points out that Telefonica has been selling down its non-core assets to raise cash, and may also consider a sale of it British unit after the UK's decision to leave the European Union.

Unicom certainly seems to fit the definition of a non-core asset for Telefonica, which was never able to do much with its Chinese partner. Telefonica had high hopes when it formed the tie-up a decade ago, hoping the union would give it better access to the world's biggest mobile market that now boasts about 1.3 billion subscribers. The Spanish carrier held as much as 10 percent of Unicom's shares at the height of its love affair.

String of Duds

Telefonica certainly wasn't the only one holding out such hopes and was joined in the China telco investment trend by Europe's Vodafone (NASDAQ:VOD) and South Korea's SK Telecom. But all three foreign telcos gradually discovered that their Chinese partners weren't interested in doing anything substantive together, and Vodafone and SK Telecom sold off their stakes years ago.

Even Telefonica realized it was gaining little, if anything, from its Unicom investment and began to sell down the stake around four years ago. Its strategy saw it halve its stake on two separate occasions, as the figure dropped to 5 percent from 10 percent in 2012, and then to the most recent 2.5 percent from a sale in 2014 (previous post). This latest sale seems to continue that strategy, since the newest 1 percent stake is a bit over half of the previous 2.5 percent.

As I've said at the outset, I'm really not sure why Telefonica is following this particular strategy and doesn't simply dump its entire Unicom investment and finalize the divorce. In some ways, it seems like Telefonica is in a state of denial and simply doesn't want to admit that its Unicom investment was a failure.

If that's the case, it should gain some comfort knowing that no other foreign company has ever been able to make money in China's highly protected telecoms services market either. At any rate, I guess I should applaud Telefonica for at least slowly selling down its stake in this unproductive partnership, and expect it will finally sell its last 1 percent by 2018.