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Vodafone, Telefonica to Set Up U.K. Mobile-Phone Venture

Telefonica SA (TEF) is considering more deals to share parts of local mobile-phone networks following an agreement to set up a 50-50 venture in the U.K. with Vodafone Group Plc (VOD), said a person with knowledge of the matter.

Spain’s biggest phone company, which operates in 25 countries and seeks to slash 57.1 billion euros ($71.8 billion) in debt after Standard & Poor’s lowered its rating last month, targets these deals to cut costs and improve network quality, the person said, asking not to be identified because the plans aren’t public. A Telefonica spokesman declined to comment.

“Spain, Germany or Ireland could be other markets where Telefonica could seek similar ventures,” said Giovanni Montalti, a London-based analyst at Credit Agricole Cheuvreux. While network quality is important, well-known operators such as Telefonica can also lure clients and differentiate themselves from rivals with prices and data services, he said.

The unraveling of takeovers and mergers in the past year, including a sale of Deutsche Telekom AG’s T-Mobile USA business and a combination of Vodafone’s Greek assets with a rival, highlight the need for European carriers to find ways to boost profitability as regulators from Washington to Brussels balk at consolidation. Telefonica and Vodafone today agreed to operate and manage a single network grid in the U.K. that will run two competing nationwide mobile Internet and voice networks.

Telefonica doesn’t regard the U.K. agreement as an isolated case and is already working on deals for other markets, the person said. Vodafone U.K. CEO Guy Laurence told reporters in London today that the deal doesn’t automatically pave the way for agreements in other markets.

Fighting Back

Telefonica gained as much as 2 percent to 9.79 euros in Madrid trading today and stood at 9.63 euros as of 1:36 p.m. Vodafone was little changed at 169 pence in London.

The two companies are trying to lower costs as U.K. competition intensifies with a group owned by Deutsche Telekom (DTE) and France Telecom SA. (FTE) While Vodafone and Telefonica will continue to compete with each other, they’re deepening their existing partnership as they prepare to roll out faster fourth- generation services.

The U.K. venture follows a more extensive merger by Deutsche Telekom and France Telecom, which pooled their U.K. wireless assets and brands into Everything Everywhere in 2010. With more mobile phones than people in Europe, the region’s operators are increasingly relying on sharing and combining networks to lower costs of expansion and offer faster data downloads.

Germany Consolidation

Telefonica already has network-asset sharing arrangements with T-Mobile in the Czech Republic. In Spain, Telefonica and Vodafone have a site sharing agreement.

A deal for Telefonica in Germany would depend on the potential market consolidation in Europe’s biggest economy, Montalti said.

Royal KPN NV and Telefonica are considering ways to merge their German units, a move that would create the country’s top mobile-phone operator by customers, two people with knowledge of the matter said this month. The companies are evaluating a variety of options, including a combination of Telefonica’s O2 Germany unit and KPN’s E-Plus, the smallest two of the nation’s four operators, according to the people.

Telefonica said last month it will explore share sales for O2 Germany and its Latin American businesses.

Failed Mergers

France Telecom merged its Orange network in the U.K. with Deutsche Telekom’s T-Mobile in 2010, creating Everything Everywhere in a bid to save more than 4 billion euros ($5 billion) in network, marketing and administrative costs by 2014. That deal, creating the country’s biggest operator and cutting the number of network companies in the country to four from five, paved the way for joint procurement projects and network sharing across all their markets.

The U.K. venture between Vodafone and Telefonica, which will have a grid of 18,500 cellular sites, is targeting indoor coverage of 98 percent of the U.K. population using second and third-generation wireless technologies by 2015. Newbury, England-based Vodafone and Madrid-based Telefonica said they will continue to run their wireless spectrum independently.

“This is yet another step that reflects what’s going on in the telecoms industry as well as part of Telefonica’s strategy to rationalize costs,” Javier Mielgo, a Madrid-based analyst at Mirabaud Finanzas said by phone today.

The average European operator will spend about 2 billion euros to upgrade an existing network to 4G technology to cover 75 percent of a country with 50 million people, according to Frederic Pujol, an analyst at researcher Idate.

Data Demand

“As demand for data services has evolved, this is a natural evolution of our arrangement,” said Ronan Dunne, CEO of Telefonica’s U.K. unit. “Individual markets will respond to their particular regulatory environment and market environment and certainly this model is very much focused on delivering the right answer for U.K. customers.”

Dunne and Vodafone’s Laurence declined to provide financial details on the venture, saying they don’t expect any synergies in revenues and no job cuts. The venture shouldn’t create any antitrust issues, they said.

To contact the reporters on this story: Jonathan Browning in London at jbrowning9@bloomberg.net; Manuel Baigorri in Madrid at mbaigorri@bloomberg.net

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

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