China restructures its telcos

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And they’re off. The long-awaited restructuring of China’s telecoms industry, which should morph four big carriers into three, kicked off yesterday. This also paves the way for the introduction of third-generation licences – a prospect that has had foreign companies salivating.

The restructuring itself, designed to create a more level playing field, could be bad news for China Mobile. Today’s dominant company has 400m subscribers and is adding almost 7m a month, equivalent to putting on an entire Hong Kong every month. China Mobile has benefited from having a hamstrung competitor. Now, in addition to stronger competition, it faces the possibility of asymmetric regulation. Mobile rival China Unicom, which is to be carved up and doled out to the two fixed-line carriers, has been hampered by the fact it is obliged to run two competing networks. It has less than a third of the market and margins on earnings before interest, tax, depreciation and amortisation came in at about 33 per cent last year compared with 54 per cent for China Mobile.

Just how much of a boon the ensuing carve-up will be depends on valuations for Unicom. The smaller CDMA network, accounting for 8 per cent of the mobile market, according to consultancy BDA, is owned by Unicom’s parent rather than the listed company, which will keep the deal behind closed doors. Unicom shareholders will, however, be compensated for the customer base, to the tune of perhaps $5bn-$8.5bn or up to $200 per subscriber. The sale or merger of Unicom’s GSM operations will probably also be conducted on a parent-to-parent basis. Investors will not be the only ones kept on hold while the multilayered process takes place. Foreign equipment makers and operators, including Telefónica and Vodafone, which have taken equity stakes in and forged alliances with local players, will remain on the sidelines for a while yet.

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