May 15, 2018 / 6:19 AM / 5 days ago

Breakingviews- Tangled loyalties complicate China Tower IPO

HONG KONG (Reuters Breakingviews) - China Tower could have communication issues with investors. The world’s biggest mobile-mast company has filed a prospectus for a Hong Kong float, which Reuters says could raise $10 billion. China’s big three telecoms operators are both key customers as well as shareholders. New backers will need to be convinced the trio won’t squeeze the company too hard as they try to keep their own costs down.

A sign of China Tower Corp is seen at the PT Expo China in Beijing, China September 20, 2016. Picture taken September 20, 2016. REUTERS/Stringer ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. CHINA OUT

China Tower is by far the world’s biggest tower operator, with almost 2 million sites. But its relationship with its backers is tangled. State-backed China Mobile, China Unicom and China Telecom own 38, 28.1 and 27.9 percent holdings respectively. While these stakes will fall after the listing, they will still have a major say in dividends, deals, and directors. They are also the group’s main customers, accounting for nearly all its sales last year.

The company says pricing depends on arm’s length negotiations. But it does not seem able to drive a very hard bargain with the three. The rates that China Tower charges them to lease capacity on its towers are already some of the lowest in the world, analysts say, and some terms were made more generous in pricing agreements earlier this year.

Prospective shareholders might worry that when negotiations come around again in five years’ time, the result could be even less favourable – assuming that the telcos gain more from punishing China Tower than they lose as investors. China Tower’s limited growth prospects already mean it is likely to get a much more modest valuation than international rivals such as American Tower, and this lack of predictability – usually a major selling point for towers businesses – could put further downward pressure on the value.

One solution could be for the trio to sell down over time to make China Tower more obviously independent. In the meantime, the signals to prospective investors are difficult to decipher.

Breakingviews

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