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Telefonica CEO Alierta Vows to Keep China Stake ‘Forever’ Amid Asset Sales

Telefonica SA (TEF) plans to keep its 3 billion-euro ($4 billion) stake in China Unicom Hong Kong Ltd. even as a sale could help Spain’s largest telephone company cut debt, Chairman and Chief Executive Officer Cesar Alierta said.

Telefonica, which last week forecast a further decline in profitability as rising unemployment curbs demand in its home market, needs the growth of countries such as China and Latin America, Alierta said in an interview at the annual Mobile World Congress in Barcelona.

“The stake in China Unicom is completely stable and we don’t plan to sell it at all,” Alierta said after a meeting with top China Unicom management. “We consider it a long-term and strategic alliance and that would be the case forever.”

To raise cash and stem investors’ concern about its increasing debt, Madrid-based Telefonica is selling non-core assets, slashing is Spanish workforce and halting major mergers and acquisitions. Sanford C. Bernstein’s analysts said this month that a sale of Telefonica’s 9.7 percent stake in China Unicom (762) could fetch 3.1 billion euros. Telefonica’s debt stood at 56.3 billion euros at the end of December.

Telefonica on Dec. 15 reduced its 2012 dividend forecast by 14 percent, abandoning a policy set up two years earlier, and said market conditions had changed “significantly.”

‘Totally Safe’

“The dividend is totally safe as it stands right now and we won’t need to cut it again this year,” Alierta said yesterday. The CEO also said he doesn’t expect further job cuts this year after a reorganization that “has provided us with the right company size.”

Last year, Telefonica agreed to increase its stake in China Unicom to about 9.7 percent in exchange for the Chinese company raising its holding in the Spanish operator to 1.37 percent. As part of the agreement, each company pledged to buy $500 million of shares in the other.

The two companies said in a joint statement today that they signed a strategic partnership to remotely manage subscription data in SIM cards enabling communication between machines.

Telefonica dropped 0.5 percent to 12.84 euros at 2:53 p.m. in Madrid. China Unicom slipped 0.1 percent to HK$13.96 on the Hong Kong exchange.

China Unicom, the nation’s No. 2 carrier, gained market share by pushing smartphones that cost 80 percent less than Apple Inc. (AAPL)’s iPhone.

China Unicom started winning customers from market leader China Mobile Ltd. (941) after it switched focus from high-end users of the iPhone to those who can’t afford the device. China Unicom started selling handsets from local manufacturers Huawei Technologies Co. and ZTE Corp. (763) that cost less than 1,000 yuan ($159), or about half a month’s salary for an urban worker.

Latin America

The strategy helped make China Unicom the best-performing stock on the benchmark Hang Seng Index last year with a 47 percent increase.

Telefonica also ruled out selling assets in Latin America, which already accounts for about half of the company’s revenue.

“We aren’t considering anything in the region at this point other than bolstering our position especially within the smartphone world,” Santiago Fernandez Valbuena, chief of Telefonica’s operations in the region, said in a separate interview yesterday.

In Latin America, the company is trying to bolster its position in the smartphone market as consumers increasingly buy data-hungry devices offering video and gaming services.

Telefonica will continue to shed some non-strategic assets, including small stakes in companies and infrastructure assets such as antennas, said Fernandez Valbuena.

Digital Growth

“That’s what we’ve been working on, but there aren’t that many remaining non-core assets we can dispose of,” he said.

To also boost growth in saturated markets, Telefonica needs to expand its digital business, Alierta said.

“Telefonica Digital will see significant growth as we take on new projects next year,” he said.

Telefonica Digital, created in September as part of a reorganization, has offices in London, Silicon Valley, Tel Aviv, Sao Paulo and Madrid and represents Telefonica’s efforts to pull together digital assets over three continents to take on Facebook Inc. and Microsoft Corp. (MSFT)

To contact the reporters on this story: Manuel Baigorri in Barcelona via mbaigorri@bloomberg.net;

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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