China Mobile makes first foray abroad with Paktel deal
China Mobile Communications Corp says it will buy 88 per cent of small Pakistani mobile operator Paktel for US$284 million, its first overseas acquisition after two failed attempts.
Paktel, a unit of Nasdaq-listed Millicom International, has an enterprise value of US$460 million. It is the smallest GSM (global system for mobile communications) network operator in Pakistan.
'It would be the natural choice for China Mobile to invest in Pakistan, in view of the good diplomatic relations between China and Pakistan,' a local analyst said.
That cash transaction is expected to be completed late next month after complying with certain regulatory approvals and procedures.
It would also culminate a lengthy courtship between China Mobile and Millicom, a Nasdaq and Stockholm-listed investor in telecommunications businesses across emerging markets, which almost led the mainland firm to acquire the whole of Millicom for US$5.3 billion last year. That deal fell apart in July after the two companies failed to agree to terms.
Duncan Clark, managing director at telecommunications and technology consultancy BDA China in Beijing, said China Mobile's Paktel purchase showed how strategic a market Pakistan represents. 'That was the Millicom asset it was most interested in, and the country has one of the highest cellular penetration growth rates in its region,' Mr Clark said.
Gartner predicted a total of 57 million cellular connections in Pakistan by 2010, spurred by the growing availability of low-priced handsets, cheaper pre-paid starter programmes and improved network coverage in rural areas.
'It might not also be a bad idea for China Mobile to build up its network outside of Chinese regulation and learn how to compete with larger operators in a small market,' Mr Clark said, noting that the operator continued dominate the mainland's cellular phone market against China Unicom.
Millicom, which has been operating in Pakistan since 1990, estimated spending roughly US$100 million for its Paktel operations, while incurring quarterly losses of a few million dollars. The company claimed difficulty operating in Pakistan, alleging an unfavourable regulatory environment.
The purchase of Paktel follows the failure of China Mobile in its bid for Ufone, the mobile arm of state-owned Pakistan Telecoms Mobile, in June 2005.
China Mobile last year gave up a bid to buy a controlling stake in Millicom for US$5.3 billion, which analysts said was too expensive.
Some market watchers said the bid failed partly because some Latin American countries where Millicom operated had diplomatic links with Taiwan and were opposed to the deal.
China Mobile said it would pay in cash for the Paktel stake and expected the deal to be completed in late Match after receiving regulatory approvals.
'The size of the deal is appropriate for China Mobile to develop its overseas business, as it won't have much to lose given its strong cash flow,' BNP Paribas Asia analyst Marvin Lo said yesterday.
However, it would be challenging for China Mobile to turn Paktel's operations around, Mr Lo added.
'Paktel ranked fifth in the six-player market and with two market leaders accounting for 70 per cent of the sector, it would not be an easy task for China Mobile to boost the market share,' he said.
Paktel had 1.529 million total subscribers as at the end of September last year, up 62 per cent from 944,718 in September 2005. It is currently the fifth largest operator by number of active subscribers in Pakistan, which has a population of about 165.8 million and an estimated mobile penetration rate of about 25 per cent.
Last November, Millicom said the future of its investment in Pakistan had been overshadowed by, among other things, the challenging business conditions in the Pakistan mobile telephony market and frequency interference issues.
It said Paktel was granted an additional 1800-megahertz spectrum to resolve those issues but the grant of such spectrum was not permanent. As such, Paktel requested the Pakistan Telecommunications Authority to resolve the interference issues permanently and asked for a deferral of the latest instalment - worth US$29.10 million - of its license fee. The authority did not grant its request.
China Mobile, which has more than 318 million subscribers on the mainland, has its work cut out in Pakistan, based on the strategy that Millicom and Paktel had set up there.
According to a report in April by research firm Gartner, Millicom has pursued a policy of price leadership in the Pakistani GSM market by selling large numbers of call minutes and relying on price elasticity.
But those efforts to sustain profit margins in Pakistan's price-sensitive mobile phone market had been hampered by the limitations of Millicom's GSM infrastructure, Gartner said.
It said Pakistani cellular phone subscribers have traditionally had low expectations of mobile network operators because 'a lack of network capacity, weak signals, and blocked calls meant they often had to call repeatedly before a connection was made'.
Shares of China Mobile Ltd, the company's unit in Hong Kong, yesterday rose 4.31 per cent to close at HK$73.85 following the report.
China Mobile Ltd had said its parent firm had a policy of selling overseas investments with good operating results to the company.
The Hong Kong-listed unit successfully expanded outside the mainland in October 2005 by buying a controlling stake in China Resources Peoples Telephone, a Hong Kong mobile operator with more than one million subscribers, for HK$3.3 billion.
According to company figures, Paktel had more than 1.52 million subscribers at the end of September last year, up 62 per cent from a year earlier.
Pakistan has a population of about 165.8 million and an estimated mobile penetration rate of about 25 per cent.
'China Mobile may export its experience in opening up rural markets to Pakistan,' said Wang Chi-man of broker Everbright Securities.
'This should be one of the synergies we can expect from the acquisition.'
Andrew Best, the spokesman for investor relations at Millicom, said yesterday the company and China Mobile both got what they wanted from the deal.
'We were looking to exit Pakistan because it did not fit Millicom's criteria for return on investment,' Mr Best said. 'I can't comment for China Mobile, but they clearly got a fair price and long-term business prospects in Pakistan look good.'