March 23, 2009, 6:09 a.m. EDT

Vodafone, Telefonica ink deal to share network infrastructure

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By Michael Carolan

(Adds executive and analyst comment.)

LONDON (MarketWatch) -- Telecoms giants Vodafone Group PLC /zigman2/quotes/202862751/composite VOD +1.08% and Telefonica SA /zigman2/quotes/200416613/delayed ES:TEF 0.00% Monday agreed a pan-European collaboration to share network infrastructure in Germany, Spain, Ireland and the U.K., in a deal expected to save hundreds of millions of pounds for both companies over the coming decade.

Under the agreement, the two companies will jointly build new sites and consolidate existing sites, allowing them to roll out enhanced services more quickly and to deliver mobile broadband to a wider population, they said in a joint statement.

The collaboration is the latest evidence of a rising tide of network sharing and outsourcing deals, as operators take a closer look at spending as revenue growth slows.

Telefonica has been forced to lower mobile and high-speed Internet rates due to stiffer competition and regulatory pressure, and as consumers look for cheaper alternatives amid a sharp economic decline in key markets.

To adjust to the new economic picture, Telefonica is scaling back capital expenditure to EUR7.5 billion in 2009 from EUR8.6 billion last year.

In January, Vodafone, which faces similar challenges, warned that full-year revenue would fall short of its forecasts and unveiled plans to cut GBP1 billion in costs. On Sunday it said it had frozen all salaries at its U.K. subsidiary and last month said it would cut 500 jobs in the country.

Telefónica Europe Chief Executive Matthew Key Monday said that while Telefónica and Vodafone would continue to compete strongly against each other in local markets, the collaboration agreement would enable enhanced mobile coverage in more locations, using fewer mast sites.

"We are actively exploring additional areas for cooperation and, by reducing our costs in areas of the business that customers don't see, we can ensure that we invest in areas they truly value," he said.

The two companies are also exploring the possibility of sharing the provision of transmission services, they said.

The deal is expected to generate cost savings amounting to hundreds of millions of pounds for both companies over the next 10 years, they said.

In the U.K and Ireland, the elements of the network to be shared include masts, antennas, sites, cabinets and power supply. In Germany and Spain, masts and cabinets are shared, along with power supply. Some core radio network infrastructure will remain independent.

The companies are also in discussions about collaborating in the Czech Republic, Michel Combes, CEO of Vodafone Europe, said in a conference call.

Combes said he didn't anticipate any competition or regulatory issues arising from the deal.

The deal is "sensible" said an analyst who asked not to be named, particularly as Vodafone still relies on Europe for a large proportion of its income and customers will benefit from enhanced services.

By 0955 GMT, Vodafone shares were up one penny or 0.6% at 121 pence in London, while in Madrid, Telefonica shares rose EUR0.16, or 1.1%, to EUR14.96, compared with a 0.6% rise in the DJ STOXX Europe Telecommunications Index.

Vodafone already operates a joint venture with France Telecom's Orange to make cost savings through infrastructure. Deutsche Telekom AG's /zigman2/quotes/213490072/composite DT -8.09% T-Mobile and Hutchison Whampoa's (0013.HK) mobile operator, 3, also share infrastructure.

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