Bottom line: Unicom’s mixed-ownership reform plan could prove a dud if it chooses too many partners, which looks likely based on the latest reports.
I haven’t written for a while about a highly anticipated plan to inject some new life into perennial laggard telco China Unicom (HKEx: 762; NYSE; CHU) through a Beijing-led pilot program, even as reports build that an announcement of the mixed-ownership plan are imminent. Those reports include the latest word that an announcement could finally come later this month.
But what caught my eye in this particular report was the number 20, a reference to how many private companies could potentially take part in this plan. That number looks a bit ridiculous to me, and would completely wipe out any potential benefits that Unicom might have received from the program. But perhaps that’s what this laggard carrier wants.
Before we go any further, let’s backtrack and review what exactly this pilot program entails for those who don’t follow the issue that closely. The idea is that China’s biggest state-owned companies lack creativity and dexterity to compete globally, and only do well domestically because they operate in state-granted monopolies. In a bid to breathe some life into these behemoths, Beijing has launched a pilot program allowing a select few companies to sell stakes in themselves to strategic private partners.
Unicom was picked as the telecoms representative in the program, probably because it’s the one of China’s three big telcos in the most need of help. Media reports have frequently speculated that the big 3 BAT, Baidu (Nasdaq: BIDU), Alibaba (NYSE: BABA) and Tencent (HKEx: 700) are potential partners, and up-and-coming JD.com (Nasdaq: JD) has also been mentioned.
For its part, Unicom has confirmed that its plan has been accepted by Beijing, and it’s currently in talks with the potential partners to sign a final agreement. It has also confirmed the deal will see those partners take a significant stake in its Shanghai-listed unit, China United Network Communications.
The latest reports have domestic media buzzing about a newly disclosed tie-up between Unicom, Tencent and Alibaba to build a business operations center. (Chinese article) But Unicom is quietly tell people this particular tie-up is not part of the mixed-ownership plan, keeping everyone guessing about when the actual plan will come and what it will entail.
Too Many Cooks
But the real news, in my view, comes later in the story when unnamed sources disclose that Unicom is still talking with around 20 companies as it works to finalize that plan, which could be announced later this month. I don’t know about anyone else, but that number was quite shocking to me, as most of us had originally assumed Unicom would choose a single partner, or at the most perhaps two or three.
The signals coming from earlier reports were already showing that Unicom was planning to work with at least two or three companies, but 20, or even 10, is way too much in my view. If that number is really true, it would make this plan looks a lot like an earlier one created by leading oil refiner Sinopec (HKEx: 386; Shanghai: 600028), which was one of the first companies in the pilot program.
That plan saw Sinopec sell a stake in its retailing operations, including its gas stations and convenience stores, to a group of 25 investors, including Tencent. (previous post) In all fairness, I haven’t personally visited those gas stations or convenience stores since the original deal was struck 3 years ago, so perhaps they’ve improved. But I haven’t heard anything too spectacular, and a look at its latest annual report shows Sinopec’s retail business isn’t doing anything too spectacular.
I’m not sure what’s behind this mentality of signing on so many new partners when clearly one or two seems intuitively more logical and would have better chances of success. My guess is that it’s a combination of the numbers game, the more the better, combined with a certain internal resistance by these state-run giants to ceding any control to private partners. That latter element is almost like a form of self-sabotage designed to protect embedded interests, and could well cause Unicom’s plan to be a dud if it chooses too many partners.