Unicom network buy: finally some strategy

PUBLISHED : Thursday, 22 November, 2012, 11:00am
UPDATED : Thursday, 22 November, 2012, 11:00am

No one is writing very much about China Unicom's (0762.HK; NYSE: CHU) newly announced plan to buy fixed-line networking assets from its parent, perhaps because people have lost all interest in this laggard telco that has been mired in management disorder for much of the last two years. Despite my own negative feelings about the company's recent performance, I'm going to go ahead and actually praise Unicom for the move, as it finally looks like the company is doing something that has a small hint of being driven by a broader corporate strategy -- something we haven't seen for quite a while.

Unicom has become the ugly step-child of China's telcoms sector over the last two years, as management dysfunction led to numerous lost opportunities to gain an advantage over rivals China Mobile (0941.HK; NYSE: CHL) and China Telecom (0728.HK; NYSE: CHL). Unicom's Hong Kong-listed shares are down around 25 per cent over the last year, underperforming its two main rivals by a big margin as investors lost interest in the company.

This latest move by Unicom is hardly groundbreaking, since it involves an internal transaction that will see the company purchase assets from its state-owned parent. But from my perspective, this looks like a potentially encouraging sign, since it could reflect the fact the Unicom's leaders may finally have a broader vision for the company after more than a year of non-stop management shuffles at nearly every level.

Let's look at the actual deal, which will see Unicom purchase fixed-line networks from its state-owned parent in 21 southern Chinese cities and provinces for 12.2 billion yuan, or about $2 billion. Unicom said it is making the purchase because owning the assets is cheaper than leasing them from its parent. For starters, this deal is probably a good one for Unicom purely from a valuation perspective, since big Chinese state-run firms usually sell assets to their listed subsidiaries at big discounts to their true value.

But I also like this deal from a broader strategic perspective, since these assets it is acquiring will complement its existing extensive fixed-line networks in northern China. Chinese telecoms historians will recall that Unicom inherited its northern Chinese fixed-line networks after the break-up of China's former fixed-line phone monopoly. The former monopoly's southern Chinese networks went to China Telecom, meaning Unicom had to build its own new fixed-line networks in those provinces to offer service there.

So Unicom's parent built those networks, and is now transferring them to Unicom with this latest transaction. The transfer means that Unicom will now own a national fixed-line network, a crucial development just as China is trying to create more competition in the market for fixed-line broadband services like IPTV and video-on-demand (VOD).

This transaction should help Unicom not only to better compete with China Telecom in south China, but will also allow it to offer a strong national broadband product to sell to big corporate customers who want to use its high-speed fixed-line data services throughout the country. The move will also help Unicom better compete against a new national cable TV operator being assembled by Beijing through the consolidation of the nation's many regional cable companies.

Again, I need to stress that this transaction was an easy one for Unicom and that it's too early to say if this marks a shift to better management and longer term vision from the company. But if this move is followed by more similar "big-picture" actions, perhaps Unicom may finally regain some status as an interesting player to watch in China's telecoms space.

Bottom line: Unicom's new purchase of fixed-line assets from its parent could reflect a returning focus to long-term strategy, perhaps marking an end to two years of management dysfunction.