Markets

Chinese Telecom Players Combine Assets for China Tower

Three state-run Chinese telecom operators have decided to divest roughly 231 billion yuan ($36 billion) worth of telecom tower assets to their joint venture (JV) company formed last year - China Tower Corp.

Holdings

In exchange for the towers, the carriers will gain a combination of shares in China Tower and cash. The world's largest wireless carrier in terms of subscriber base - China Mobile Limited CHL - will divest 118.4 billion assets for a 38% stake and 65 billion yuan in cash.

Meanwhile, China Unicom Ltd. CHU will attain a 28% hold in the jointly owned company along with 25.4 billion yuan in return for 63.2 billion tower assets. Lastly, China Telecom Corp. Ltd. CHA will vend 34.3 billion assets for a 28% stake and 3.1 billion yuan. The remaining 6% stake will be held by state-owned China Reform Holdings for 8.1 billion yuan.

Details

The joint entity was formed by the advice of the government to assist the operators in minimizing the construction of unnecessary towers as well as capital expenditures.

China Tower will focus on operating, managing and maintaining the combined wireless tower assets of these three operators, who will be leasing back access rights to the towers. Additionally, the joint entity will look to engage in upgrading and extending mobile networks, counting the present rollout of 4G wireless Internet service.

The companies expect to complete the transaction by the end of October, subject to conformity with the final leasing terms.

Notably, according to the telecom companies, the pooling of assets will allow them to share the telecom infrastructure, attain economies of scale, control costs and also ramp up the rollout of their individual networks.

Synergies

China Mobile will be recording 19.5 billion yuan in pre-tax capital gain by the virtue of the tower asset disposal. Meanwhile, pre-tax capital gain for China Unicom and China Telecom will stand at 9.7 billion yuan and 5.1 billion yuan, respectively.

However, with respect to earnings, China Unicom will profit the most from the asset disposal. As per Nomura Securities estimates, China Unicom's earnings in 2015 will get a 43% boost from the transaction, followed by an earnings boost of 15% for China Telecom and 8% for China Mobile.

Who Gains?

China Unicom stands to benefit the most from the formation of China Tower as the carrier has the leading number of towers on a market-capitalization basis, followed by China Telecom.

Meanwhile, market pundits opine that the restructuring would not be quite beneficial for China Mobile. This is because the smaller carriers - China Unicom and China Telecom - will be able to combine resources and share the cost of infrastructure with a much larger player like China Mobile. As a result, the carriers might expand their market share following an improvement in their respective network coverage.

Bottom Line

The telecom companies in China are under tremendous pressure owing to the introduction of new services like free messaging apps, which is hitting the carriers' income from text and voice services hard, resulting in declining revenues.

In this regard, the success of the new joint venture can prove instrumental in giving a new lease of life to the carriers' top line.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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