HONG KONG (Reuters) - China kicked off its overhaul of the world’s largest telecoms industry on Monday with mobile operator China Unicom paying $24 billion for a fixed-line peer and selling a network for almost $16 billion.
After years of waiting and false starts, Beijing last month unveiled a sweeping shake-up aimed at speeding up the roll-out of high-speed third-generation mobile services for its 1.3 billion people.
Monday’s deals give top fixed-line operator China Telecom a foot in the mobile market while second-ranked mobile operator Unicom gets fixed-line firm China Netcom to work with.
The advent of 3G will mean China’s phone users can join those in advanced economies who already enjoy speedy Internet access, games and a host of multimedia content from maps to music on their mobile phones.
That could unleash billions of dollars in spending as China’s newly revamped phone giants invest to compete, including work for network equipment makers such as Ericsson, Motorola, Nokia, Nortel and Siemens.
Unicom will issue slightly more than 10 billion new shares to buy China Netcom at a ratio of 1.508 per Netcom share.
The deal is worth about HK$186.7 billion ($23.9 billion) based on its last closing price of HK$18.48 and assuming no outstanding Netcom options are exercised.
It also agreed to sell the smaller of its two wireless networks to China Telecom and its parent firm for 110 billion yuan.
“This is the only way China Telecom is going to get into the mobile business,” said BOC International’s Allan Ng.
The shake-up also opens the door to foreign investors who have been restricted to taking small stakes, such as Vodafone’s
3.3 percent investment in China Mobile.
Spain’s Telefonica owns 7.2 percent of Netcom, which will be delisted following the merger. South Korea’s SK Telecom owns about 6.6 percent of Unicom.
Analysts said Unicom, which has been losing market share to the larger China Mobile, seemed to win out in both deals. They noted it is getting Netcom at a 4 percent premium to its market capitalization of about $23 billion.
“Unicom walks out as the biggest winner for selling off its burdensome CDMA business at a huge premium,” said Marvin Lo, an analyst at Daiwa Institute of Research.
Analysts noted China Telecom is buying a CDMA network which only broke even in 2006 after years of losses and is just a third the size of Unicom’s GSM-standard network.
“The profitability of the CDMA business is low,” said Daiwa’s
“Investors might have doubts as to how long will it take for China Telecom to turn that around, and how much will it take China Telecom to invest in upgrading the network. I expect China Telecom will face short-term selling pressure.”
China Telecom’s parent will pay 66.2 billion yuan for Unicom’s CDMA-standard network, while its listed unit will pay another 43.8 billion yuan, allowing it to offer wireless services and compete with China Mobile.
Still, some analysts remain skeptical because of past false dawns for 3G in China.
“The government is the owner of all the players and the umpire and determines the playing field,” said Duncan Clark at consultancy BDA in Beijing.
“This is the first step toward 3G, but does it mean 3G will come sooner? That remains to be seen.”
Shares in China Unicom, Netcom and Telecom have been suspended since May 23, when the government announced a series of telecom sector leadership changes. They are expected to resume trading on Tuesday.
China Mobile shares closed up 2.5 percent on Monday, rebounding after losing about a tenth of their value in a week as investors fretted about heightened competition with two strengthened rivals.
China Telecom is in discussions with potential strategic investors, said an executive with direct knowledge of the matter, who declined to be identified.
It has 34 billion yuan in cash but will fund the purchase by issuing debt and did not rule out a stock issue.
“China Telecom’s debt burden is relatively light,” said Nomura analyst Kelvin Ho. “The easiest way to finance the deal will be to sell bonds, then perhaps they’ll consider foreign investors.”
JPMorgan, CICC and Lehman Brothers advised Unicom on its two deals. UBS advised the China Telecom group, while Citigroup and Rothschild advised Netcom.
Additional reporting by Tony Munroe in HONG KONG and Kirby Chien in BEIJING; Writing by Edwin Chan; Editing by Anne Marie Roantree & Jason Neely