China Unicom Ends NTT & Itochu Ventures, Eyes Listing
By Biddy Chan at Bloomberg News
19 August 1999
China Unicom, the nation's No. 2 telephone service provider,
said it will end a mobile phone venture with Nippon Telegraph
and Telephone Corp. and Itochu Corp., the first of dozens it
must halt to clear the way for a planned $1 billion stock sale in
Hong Kong and the U.S.
Unicom needs to persuade its foreign partners to end some 50
ventures it formed since its birth in 1994 to ease potential
concern from securities regulators over the ownership of its
networks. Foreigners have pumped about $1 billion into these
ventures, Unicom said, exploiting a regulatory loophole that
otherwise bars overseas investment in the industry.
"The termination of CCF cooperative projects is merely to
correct an irregular financing arrangement," Unicom Chairman
Yang Xianzu said.
At the same time, Unicom's plans are a key test of China's
willingness to open its fast-growing telephone market to
foreign competition, part of the concessions it will have to
make to join the World Trade Organization.
And many of Unicom's partners say they have no interest in
ending the relationship. Unicom shares revenue from the
ventures with its partners, and often doesn't own the
equipment until they have recouped investments.
If Unicom can't persuade its foreign partners to withdraw, it
may be forced to postpone or even scrap its stock sale -
setting back efforts to raise the funds it needs to challenge
near-monopoly China Telecom Group.
"From the foreign investors' side, the solutions have to take
into account that Unicom may not get its IPO off" this year or
next, said William Krueger, chief executive at Xin De Telecom
International Ventures Co., a venture between China
International Trust & Investment Corp., Siemens AG and
Deutsche Telekom AG that has worked with Unicom in China.
Many of Unicom's 27 foreign investors, including Sprint Corp.,
France Telecom SA and Telecom Italia SpA, aren't interested
in walking away from a toehold in the world's most populous
country with cash alone.
In part, it's also the money: So far, Unicom has offered to
repay only investment costs plus a single-digit return linked to
Chinese deposit rates. Unicom didn't say today whether it
compensated NTT and Itochu for ending the venture in
northern Hebei province.
"We don't want to terminate the joint ventures," said Pascal
Nedellec, Beijing-based chief China representative at France
Telecom, which invested $49 million in two Unicom mobile
networks in southern Guangdong province.
When Unicom was established five years ago, it received only
limited funds from its 16 shareholders, including Citic, China's
biggest investment company, and China Everbright
International Trust and Investment Corp.
Seeking more cash, Unicom developed a so-called
China-China-Foreign joint venture model that is technically
legal, though it skirts Chinese regulations that forbid foreign
investors from owning and operating telecoms networks.
It worked like this: Foreign companies formed partnerships
with a Chinese firm that was usually a Unicom shareholder.
Since that venture was registered in China, it was considered a
Chinese company, and thus could legally form a partnership
with Unicom.
Between 1994 and 1996, Unicom formed 43 of these ventures
to develop GSM mobile networks in almost 100 Chinese cities,
as well as four ventures to develop fixed-line networks in the
city of Tianjin and western Sichuan province and two
ventures to develop paging systems in Beijing and the eastern
Jiangsu province.
Unicom built and now operates these networks using funding
and technical help from the foreign companies, who receive a
fixed share in the revenue generated from those networks in
return.
Starting last summer, however, Unicom began telling its
foreign partners that these ventures, many of them signed
with the full backing of China's senior leadership, were
"irregular" or "improper" under Chinese law.
From Unicom's perspective, it doesn't have much choice. It
can't issue shares in itself as compensation because China has
insisted in its talks to join the WTO that it won't allow foreign
ownership of more than 25% of a Chinese telecoms service
provider.
At the same time, it doesn't have much cash.
Unicom needs more than $1 billion to develop a nationwide
CDMA mobile network, a long-distance telephone service and
a data service network linking 90 Chinese cities. It may have to
triple the size of its share sale to $3 billion to repay the foreign
partners and to meet its own funding needs.
Unicom could choose to list only its businesses that aren't
tied up in foreign partnerships. They now include a
nationwide paging business with 30 million customers
formerly controlled by China Telecom, and could be enhanced
by Unicom's recently received nationwide Internet license.
Unicom could also decide to include only some of its foreign
ventures in the listing. Having ended its partnership in Hebei,
it now plans to focus efforts on businesses in Beijing,
Shanghai, and Hebei, Guangdong, Shandong, Zhejiang and
Fujian provinces.
Either way, Unicom is well aware that it needs to maintain its
relationship with foreign companies if it is to prosper in what
is likely to be a far less regulated Chinese market in the future.
"Unicom needs foreign strategic partners," said France
Telecom's Nedellec. "It's impossible for it to live alone."
Copyright 1999, Bloomberg L.P. All Rights Reserved. |
