Bottom line: Telefonica’s sell-down of its Unicom stake presages an exit from the investment next year, ending a decade of failed tie-ups by foreign telcos looking to tap the Chinese telecoms services market.
Chinese telco shares may look like a good bet for small investors hoping to profit from company stock gains, but they’re a clear dud for foreign carriers hoping to profit from China’s huge but highly protected telecoms market. That’s my latest assessment following word that Spain’s Telefonica (Madrid: TELF) is further selling down its stake in China Unicom (HKEx: 762; NYSE: CHU), in what looks like a prelude to a complete exit from this problematic investment.
If Telefonica does indeed completely dump Unicom, it would mark the end of a decade-long courtship that saw some of the world’s top telcos invest heavily in their Chinese counterparts. All of those investments ended in divorce, with the foreign carriers selling their shares when they failed to get any strategic benefits from the tie-ups.
All that said, one important question that remains is whether these stocks are good investments for smaller buyers who just want to make some profits from rises in share prices. My answer to that question would be a definite “yes”, though I currently favor resurgent industry leader China Mobile (HKEx: 941; Nyse: CHL) and would definitely avoid Unicom, which has proven to be a perpetual industry laggard.
According to the latest headlines, Telefonica has just sold half of its 5 percent stake in Unicom, bringing its holdings down to 2.5 percent. (English article) It sold nearly 600 million shares for HK$11.14 each, representing a 3 percent discount to Unicom’s last closing price. That discount actually looks quite modest and reasonable, and probably reflects strong general demand for Chinese telco shares due to big hopes for their new 4G services.
Telefonica’s sell-down represents an approaching conclusion for the Spanish company’s decade-long China foray, which failed to produce any concrete benefits. In 2005 Telefonica bought 3 percent of Netcom, one of 2 Chinese telcos that later got merged to form the current Unicom. Telefonica raised its stake in the current Unicom to 10 percent in 2011, when it still had hopes for the alliance.
But then the European debt crisis happened, which hit Telefonica’s home market in Spain especially hard. That led Telefonica to sell half of its Unicom stake in 2012, bringing it down to the 5 percent before this latest sell-off. Telefonica said in a statement that it’s still committed to the strategic alliance with Unicom, but I fully expect it to completely sell its remaining stake by the end of next year.
Telefonica’s exit would make it the third major foreign telco to dump its strategic stake in a Chinese partner. Others who have previously sold off similar stakes include European giant Vodafone (London: VOD), which had a tie-up with China Mobile; and South Korea’s SK Telecom (Seoul: 017670), which had a tie-up with an earlier version of Unicom that was ultimately merged with Netcom to form the current Unicom.
All of the foreign telcos had big hopes for China, believing they could tap their Chinese partners to set up joint ventures and launch other initiatives to profit from a market with more than 1 billion users. But the Chinese telcos, which are all state-owned and closely tied to Beijing, repeatedly showed little or no interest in such tie-ups. That lack of progress ultimately led to these latest divorces.
I seriously doubt that any major foreign telcos will make new investments in their Chinese counterparts anytime soon, based on the failed experiences of Vodafone, SK Telecom and now Telefonica. But we could see new tie-ups between the foreign carriers and some of China’s new crop of virtual network operators (VNOs), which are mostly privately owned and are far more dynamic and creative than that the stodgy big 3 telcos.