Mobile deal lifts China Telecom
China Telecom, the world's largest fixed-line network operator, saw its share price climb to the highest in three months yesterday, on news that it plans to pay more than 120 billion yuan (HK$147.10 billion) to acquire the mobile infrastructure of its parent company.
State-owned parent China Telecommunications Corp is currently leasing out its domestic mobile network, which supports the 2G cdmaOne and 3G CDMA2000 standards, to its Hong Kong-listed subsidiary.
At the end of trading yesterday, China Telecom's share price finished up 2.27 per cent to HK$4.05. That was the stock's highest close since it reached HK$4.11 on May 2.
A Reuters report yesterday, which cited two sources familiar with the matter, said China Telecom planned to spend an amount that is more than the book value of the mobile assets it wanted to acquire.
The estimated book value of its parent's mobile network was 120 billion yuan at the end of last year.
Lisa Soh, an analyst at Macquarie Securities, said the reported purchase price of more than 120 billion yuan was 'about 10 per cent higher than the 104 billion yuan amount we had estimated' for the proposed transaction.
The smallest of the mainland's three nationwide wireless network operators, China Telecom, has consistently broadcast its intention to acquire its parent's mobile infrastructure since March last year.
The acquisition would allow it to cut expenses by avoiding the escalating costs of leasing the network.
In 2010, China Telecom, which is a carrier-partner for Apple's iPhone, renewed the 'CDMA Network Capacity Lease' deal with its parent for a further term, which will expire on December 31.
The lease fee last year amounted to 19.01 billion yuan, a 42.7 per cent increase from 2010.
A spokeswoman for China Telecom yesterday said the company was still in the process of negotiating with the parent company on the terms of the acquisition and that no agreement had yet been reached.
'China Telecom plans to acquire the mobile network assets from its parent company by the end of this year and will submit the proposal to the shareholders for approval in due course,' she said.
The sources cited by Reuters also said that China Telecom will fund the planned acquisition with its own resources and debt financing.
Macquarie estimates show that China Telecom, which had 144.18 million mobile subscribers and 167.49 million local-access lines at the end of June, is able to take on new debt. 'We have its gearing [a measure of financial leverage] increasing to 45 per cent this year from 10 per cent last year, which is in line with its previous guidance,' Soh said.
She described that amount of leverage as just slightly lower than the 48 per cent gearing estimated this year for larger rivals China Mobile and China Unicom.
'It will hurt China Telecom's free cash flow this year, but I think they will be able to find the debt facilities to fund the acquisition,' Soh said.
'We have the acquisition being positive for its earnings per share in 2014,' she said.