Spain's Telefonica said yesterday it will raise its stake in China Netcom by 5.75 percent to bolster its presence on the mainland, the world's largest telecoms market.

Telefonica will pay up to 802 million euros ($1.1 billion) to buy the stake from US-based fund manager Alliance Bernstein Holdings, the telecoms company said in a statement, taking its holding in China Netcom to over 12 percent.

This in turn will give it a stake of around 5.5 percent in the new company resulting from the imminent merger of China Netcom and China Unicom, making it the leading private shareholder in the new entity.

On May 24, the authorities unveiled a long-awaited reshuffle of the telecom industry by creating three full-range service carriers through acquisitions: China Mobile, China Telecom and the Unicom-Netcom entity.

Analysts say the newly-enlarged mainland operators need the expertise and technology that foreign firms can bring, although one said Telefonica was the main beneficiary of this deal.

"The holding by Telefonica mainly benefits Telefonica more than it benefits the new group," said Steven Liu, an analyst at DBS Vickers.

"We believe Telefonica's interest in Netcom is part of a broader strategic push by Spain to strengthen ties with China and diversify their traditional international focus on Latin America," said Tucker Grinnan, analyst at HSBC.

Growth is slowing in Telefonica's home market Spain, which accounts for just over a third of sales, as the country undergoes a sharp economic downturn.

"The move is just to maintain the proportion of Telefonica's stakes in China Netcom with the dilution of its holdings after the merger with China Unicom," said Linus Yip, a strategist at First Shanghai Securities.

However, Patrick Shum, chief portfolio strategist of Karl Thomson Securities, said Telefonica hardly capitalizes on the imminent release of 3G licenses. "Profit margin of wireless operators is expected to squeeze because of the furious market competition."

Although the market had widely expected Telefonica's move, investors took the opportunity to buy up Netcom stock which had been oversold, pushing the shares up almost 6 percent before receding to trade up 2 percent at HK$18.60.

Netcom shares had fallen to their lowest levels in more than a year on mainland restructuring uncertainties. Telefonica was steady, up just 0.23 percent at 17.36 euros.

Reuters contributed to the story

(HK Edition 09/05/2008 page2)