Rather than doing big-bang privatisations which financial markets would find indigestible, Beijing has been doing them in bite-sized chunks. Hence when it listed in 1997, China Mobile started out with the networks in Guangdong and Zhejiang provinces. The following year, it bought the Jiangsu operations from its parent and in 1999 paid out for another three provinces. In 2000, it bought a further seven provinces. The purchases resulted in two share placements and China Mobile's shares outstanding rising to 18.6 billion from 11.6 billion. While that was dilutive to existing shareholders, there was no investor revolt as the extra provinces were bought at what were considered reasonably generous discounts to market value, bringing extra returns. This week, China Unicom took a leaf out of its rival's book and announced it was buying the cellular networks of eight provinces and a city from its parent. Unicom is paying out 4.8 billion yuan (about HK$4.49 billion) and assuming 17.7 billion yuan in debt. The market was led to expect Unicom, too, would be obtaining the new assets at a generous discount and that is certainly the spin the company and some analysts put on the deal. UBS Warburg analyst Dylan Tinker calculated Unicom was making the acquisition at a price-earnings ratio of 7.2 times next year's earnings, a 45.8 per cent discount to his projected 13.3 times PE for Unicom. It should see earnings per share grow by between 17 per cent and 21 per cent, Mr Tinker said, depending on how much of the new provinces' debt Unicom chose to retire. OCBC Investment Research said there were also benefits from Unicom bulking up its subscriber base by 27 per cent, to 52.7 million. Besides, it is possible to see the sunny side of the fact the new provinces have mobile phone penetration rates of only 10.2 per cent against the 20.8 per cent for its existing provinces, 'suggesting there should be room for growth in the intermediate run', OCBC said. Unicom's shareholders are not facing a dilution. The deal is being funded from internal resources and debt. However, there are downsides. The acquisition and the new provinces' debt load means gearing will jump to 30 per cent from 5 per cent while capital expenditures will rise 2.08 billion yuan this year and 1.45 billion yuan next year. There is also reason to think Unicom may have done some spinning with the numbers. With variables, such as tax, depreciation and amortisation, it is easy to fluff up earnings and make the provinces look as if they are trading on a low PE multiple and so make it appear the listed company is getting a good deal. Another, perhaps fairer, way to value them is on an enterprise-value to subscriber basis. On that metric the company says its listed assets are trading at US$212 per subscriber, much higher than the new provinces which were valued at US$168 per subscriber. However, DBS Vickers Securities analyst Wallace Cheung said the figure for existing assets included Unicom's paging and fixed-line assets as well. By stripping out paging and fixed-line assets, Mr Cheung calculated that the listed company's existing mobile networks were valued at US$173 per subscriber, only slightly higher than the valuation of the new provinces. Besides that, the new provinces will generate only 650 million yuan in earnings next year, the company said, lower than analysts had been led to believe. Mr Cheung had forecast 903 million yuan. The market may be seeing it Mr Cheung's way with Unicom's share price coming off 5.08 per cent to HK$5.60 since details of the deal were announced. By recommendation, analysts are mostly bullish, with 12 strong buys, three buys 12 holds and only six underperform or sell ratings, according to Thomson First Call. But the median price target is only HK$6.10 - suggesting limited upside. With the stock having bounced nearly 35 per cent from last month's record low of HK$4.15, investors may have decided now is the time to hang up on Unicom. Even OCBC with its upbeat interpretation of the acquisitions said: 'We believe most of the good news should already be in the price. Hence [we] recommend profit-taking above HK$6.' Graphic: uni22gbz
