China Unicom IPO Gains Momentum But Exit Strategy for Foreign Firms Still Unclear
By William J. McMahon
ChinaOnline Reporter
(6/28/99) China Unicom, the country's number two telecommunications
company, is in the midst of planning to list shares on either the New
York or Hong Kong Stock Exchange. Last week, word in telecom circles
in China was that Morgan Stanley had won the bid to underwrite the
listing and that it could take place as early as this fall.
China Unicom, established in 1994 to offer competition to the country's
telecom monopoly, China Telecom, must resolve one major financial
issue before the IPO can go forward: the "zhong-zhong-wai," or
China-China-Foreign (CCF), financing scheme.
CCF was used initially by China Unicom as a way to raise much-needed
capital and, at the same time, skirt regulations barring foreign
investment in China's telecommunications sector. The practice was
ruled illegal in October 1998.
The estimated 43 to 45 foreign investors in China Unicom including
multinationals such as Sprint Communications and Motorola--have
demanded fair compensation for their investment. China Unicom and its
Chinese investors, however, remain undecided on how the compensation
will be doled out.
Exit Strategy for Zhong-Zhong-Wai
China is considering three approaches to resolving the CCF problem,
according to telecommunications experts. China Unicom will either:
1.Buy out the foreign investors in cash, giving them a 10-15%
return on investment,
2.Treat the investments as "loans," which will be repaid, plus
interest, under terms set up by Chinese banks or
3.Give foreign investors the equivalent of their investments in IPO
shares.
Foreign investors prefer the third option, while the second is favored by
domestic investors in China Unicom.
"If they do an IPO, they have to share with the foreign investors," said
Bob Becker, assistant VP of Business at Sprint. Becker said his
company, and the other foreign telecoms, have valid contracts that must
be honored or compensated.
"To say these projects are illegal is not correct," Becker said. "From
that regard, we are in our rights to invest in those projects."
Becker said Sprint had invested in a China Unicom's land line venture in
the municipality of Tianjin. The Tianjin operations are China Unicom's
only land line operations, the rest are mobile communication services
and paging services.
He also said that the central government has not issued any official
statements on CCF, and has not told Sprint that their investment is
illegal. "We have [however] been told we can't up the investment."
Industry insiders report that China Unicom will be going ahead with the
IPO. The company's decision to go through with an overseas listing lead
some to believe a solution must have been found to the CCF
conundrum.
"China Unicom held a beauty contest with several banks," said Doug
Maclellan, chairman of Q-East, a telecommunications equipment and
services provider with business interests in China Unicom. "Whoever
won must have offered a substantive plan to resolve zhong-zhong-wai,"
Maclellan said.
Sources who prefer to remain unnamed believe winner of the "beauty
contest" is Morgan Stanley.
IPO Strategy
China Unicom can list overseas several different ways, depending on
which assets it wants to include. The company operates a land line
service in Tianjin, several GSM mobile phone networks in major cities
(including Beijing, Shanghai and Guangzhou), and in May the company
bought Guoxin Paging, the country's largest paging company.
Then there is the feather in the cap: China Unicom's sole license to
operate the future CDMA network, the U.S.-developed, next-generation,
nationwide mobile phone platform.
"There's synegry here that can be significant," Maclellan said,
describing China Unicom's separate units. China Unicom could list its
CDMA units, paging units, or GSM units together, separately, or
grouped in some fashion.
Maclellan says the CDMA license alone could be worth over US$1
billion. The telephone operator plans to spend RMB 7 bln (US$84.6 mln)
this year to add two million lines to its existing network.
Next year, the company has said it plans to have 10 million lines in
place and to be operating in 160 cities. By 2003, the company aims to
capture 30% of the cellular market, with 50 million lines and 35 million
subscribers.
China Unicom will take over the operations of existing trial CDMA
networks in Beijing, Shanghai, Guangzhou and Xi'an that are currently
operated by another telecom company, China Great Wall
Communications.
"Motorola owns part of China Great Wall," said Joseph Locke, Equity
Analyst for ABN AMRO Asia in Hong Kong. "Therefore it is now a part
owner of China Unicom."
Gouxin Paging
The paging and GSM operations as a group could be even more
valuable, if listed. Guoxin Paging, which plans to seek a domestic listing
this year, provides China Unicom with much-needed capital.
Made up of dozens of pager operators throughout China, it has 39.5
million subscribers and 60% of the domestic pager market.
Guoxin had revenues in the first quarter of this year of RMB 2.3 bln
(US$272.1 mln)–three times those of China Unicom for the same period.
It has RMB 13 bln (US$1.6 bln) in assets and made a profit of RMB 1.5
bln (US$175.7 mln) last year.
China Unicom has plans to invest RMB 23.8 bln (US$280 mln) this year
to expand GSM capacity by 5.7 million lines, bringing its total capacity
to over 9 million lines and its total number of subscribers to over 4.5
million. If this plateau were reached, the operator would account for 10%
of GSM network users in China.
But which ever divisions are chosen to list abroad, they will have to
attract enough interest to recoup the estimated US$1.4 billion foreign
investment in China Unicom, plus the expected 5-10% return that foreign
investors demand, Maclellan says.
Lester Gesteland also contributed to this report.
To contact William J. McMahon or Lester Gesteland:
P: (312) 335-8881
F: (312) 335-9299
E: lgesteland@chinaonline.com
E: bmcmahon@chinaonline.com
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