TELECOMS: Unicom Gives Latest Signal of Carrier Shakeup

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Bottom line: Unicom and China Telecom are likely to strike a major new network sharing agreement next year, and could ultimately merge in 2017 if several pilot programs to liberalize China’s telecoms services market gain momentum.

Unicom studies resource sharing

Wireless carrier Unicom (HKEx: 763; NYSE: CHU) is giving the clearest signal yet of a coming shakeup in China’s telecoms space, with disclosure that it’s exploring a potential pooling of infrastructure resources with other companies. Word of the move comes in a bigger announcement from Unicom trumpeting the launch of its new 4G+ service, as it plays catch-up to archrival China Mobile (HKEx: 941; NYSE: CHL), which has been offering 4G service for nearly 2 years now.

Industry watchers are more likely to focus on Unicom’s network-sharing part of the announcement, which comes towards the end of the carrier’s brief new stock exchange filing. That’s because the disclosure marks the latest signal of a looming reorganization for China’s 3 state-run telcos, following rumors that began in the summer after a leadership shuffle within the trio.

That shuffle saw the heads of China’s 2 smaller carriers, Unicom and China Telecom (HKEx: 728; NYSE: CHA), change places. (previous post) Such a move would be unthinkable in any western country, but is actually quite normal in China’s big state-run companies where top positions are often training grounds for Communist Party officials and bureaucrats.

That shuffle prompted some to speculate a shakeup could be coming that would see Unicom and China Telecom merged to better compete with industry giant China Mobile. Such a move made sense because the smaller telcos only controlled a third of China’s massive market collectively, while China Mobile held the rest. That ratio has remained roughly unchanged for much of the last 5 years, despite Beijing’s best efforts to create a more level playing field.

Against that backdrop, let’s look at Unicom’s latest network-sharing plans hidden at the bottom of a bigger announcement for the launch of its 4G+ service under its Wo brand name. (company announcement) We’ll skip that part of that announcement, which is mostly fluff, and go straight to the bottom where Unicom announces the potential for sharing network resources as a sort of afterthought.

In that part of the announcement, Unicom says it will accelerate the construction of its 4G network and “concurrently explore the expansion of co-building and sharing of infrastructure facilities to optimize resources allocation.” No names are given in the announcement, but  the most obvious partner for such resource sharing would be China Telecom, whose current Chairman Chang Xiaobing is intimately familiar with China Unicom after spending years at the head of the company.

Confirming Earlier Reports

This particular announcement provides confirmation from November reports, which said that Unicom was studying a plan for network sharing with China Telecom. (previous post) The reports cited Unicom confirming such a plan was being crafted, though this new filing marks the first time the company has issued a public statement on the matter. China Telecom declined to comment at the time of the earlier reports, and hasn’t issued any new comments to date.

Now that we’ve covered the latest developments, the bigger questions are: What’s next and how will shareholders of the companies be affected by future developments? At this point it’s still not really clear whether Beijing plans to merge Unicom and China Telecom, or just force them to work more closely together to better utilize their resources.

My best guess, based on years of following these companies, is that the Ministry of Industry and Information Technology (MIIT) has yet to make a final decision on the topic. Accordingly, this network-sharing plan is likely to move ahead and will probably result in a formal agreement sometime next year. The 2 sides will probably be pressured to integrate their operations after that, with the result that an outright merger could come sometime in 2017 if things go smoothly.

But all that said, there’s still no clear signal that things will go according to plan, and Beijing could even worry that reducing the field of carriers from 3 to just 2 might stifle competition. To offset those concerns, the MIIT has recently launched a number of pilot programs, including one that is letting private companies like Alibaba (NYSE: BABA) and JD.com (Nasdaq: JD) offer telecoms services by leasing network capacity from the big state-run carriers.

If those trial program start to gain some traction in the next 2 years, it’s quite possible the regulator could gain enough confidence to move ahead with a consolidation for China Telecom and Unicom into a single company. In terms of what the move would mean for shareholders, the answer is still a bit unclear.

A merger deal would probably offer shareholders a premium for their Hong Kong- and US-listed stock, but that could still be at least 2 years away. In the meantime, anything is really possible for the stocks of all 3 carriers, as they aggressively promote 4G services in a Chinese telecoms services market that is becoming increasingly saturated.

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