Lines lead to three merged telecoms operators

An expectation that China will issue 3G licences to only three out of the four major telecommunications players next year has led to various versions of how the sector will be restructured.

Since last year, share prices of the four telecoms counters have moved on reports of an imminent reform of the 500 billion yuan (in revenue) industry. A Sina.com news report on Tuesday was the latest trigger for renewed speculation, resulting in sharp share price gains for China Unicom.

The nut of the report was that six basic telecoms service operators will be merged into three mega groups. The scenario has China Telecom getting China Unicom's GSM network plus the northern assets of small fixed-line carrier China Railcom. The second group will emerge from China Mobile absorbing China Satellite Communications Corp (Satcom). Railcom and Satcom are not listed.

The third group would involve China Netcom merging with China Unicom's CDMA network and the southern network of Railcom - to create a 'new China Unicom'.

The report did not state which firm would be eaten and who would do the gobbling, but Unicom shares rose on the suggestion that Netcom would be the one getting bought.

The claims were quickly denied by company executives but industry watchers are convinced radical reform is in the offing especially since the government is committed to making 3G services available by the 2008 Olympics.

This timetable means that licensing must be completed by 2006, according to CLSA telecoms analyst Francis Cheung.

Any restructuring will involve the merging of telecoms assets - an exercise that requires approval from minority shareholders of the four listed operators. As such, restructuring proposals should now be on the agenda of the biggest parent of all the four listed operators - the State-owned Assets Supervision and Administration Commission (Sasac), he said.

Lehman Brothers analyst Lu Sun wrote in a report that any restructuring was likely to happen by the first quarter of next year.

Market watchers may hold differing views on the restructuring but all prominently feature Unicom - the only operator offering mobile services using both GSM and CDMA networks.

Since Unicom's CDMA network continues to incur losses, it is logical that Sasac will direct that this network be taken over by Netcom and its GSM network be taken over by China Telecom.

'It would in fact be favourable to China Unicom if it can use the proceeds from selling its GSM network to China Telecom to fund 3G network development,' said Yan Xu, assistant professor at Hong Kong University of Science and Technology's department of information and systems management.

The shake-up smacks of draconian policy fiat but a central objective is to avoid overlapping network investments through a consolidation of market players down to three firms.

As such, the three operators would then each get a 3G licence based on three technologies - WCDMA, CDMA2000 and the homegrown TD-SCDMA, analysts said.

Unicom's two networks were likely to be run more efficiently if they were merged with the two fixed-line carriers, analysts said.

China Telecom and Netcom will also benefit from bundling mobile and fixed-line services. In addition, the fixed-line players would acquire mobile networks allowing a migration to 3G services rather than forcing them into a greenfield project.

BNP Paribas Peregrine analyst Marvin Lo wrote in a report that assuming Unicom's GSM network was bought for 1.2 times its book value, China Telecom would need to pay $72 billion for the assets.

Mr Cheung said Unicom's investors were likely to be offered a share-swap option in the form of new shares in the entity created by a Unicom merger with Netcom.

'Unicom shares are undervalued as its two networks are not well-managed. Investors with big risk appetite should invest in Unicom shares because if another operator is running its network, it would be managed better,' Mr Cheung said.

For China Mobile, the prospect is less favourable as it has thrived in large measure because its closest rival has been weak, a situation that seems likely to be remedied.

How China's Telecoms sector might shake out

Scenario 1: Four becomes three

China Telecom acquires China Unicom?s GSM network

China Netcom buys Unicom?s CDMA network

Unicom disappears leaving China Mobile, China Telecom and China Netcom as 3G licence holders

Scenario 2: Four stays four (The China Telecom proposal)

China Telecom and China Netcom jointly buy one of Unicom?s two networks ? preferably the GSM asset ? with Telecom operating the network in the north and Netcom in the South. The pair also receives a 3G licence for the network.

Scenario 3:

Four becomes two

China Telecom merges with China Unicom

China Netcom merges with China Mobile

Both enlarged companies awarded 3G licences

Scenario 4: Six becomes three

China Mobile buys small operator China Satcom

China Telecom buys the northern assets of China Railcom, along with China Unicom?s GSM network

China Unicom keeps its CDMA network, merges with China Netcom and buys the southern assets

of China Railcom