Bottom line: Unicom is likely to choose all 3 of the BAT companies as equity and strategic partners under Beijing’s pilot program to invigorate big state-run companies, but none of the tie-ups will produce meaningful results.
China Unicom (HKEx: 762; NYSE: CHU), the perennial laggard among China’s 3 major telcos, is reportedly looking for new life by tying up with the nation’s big 3 Internet companies, Tencent (HKEx: 700), Alibaba (NYSE: BABA) and Baidu (Nasdaq: BIDU). I might normally say “so what?” to this particular development, since it seems like Unicom and its 2 fellow state-run telcos are regularly announcing this kind of partnership, always with little or no meaningful impact on their business.
But this time is different, as Unicom may actually sell a stake in itself to one, two or all three of China’s largest Internet companies, sometimes collectively referred to as BAT. Unicom was chosen a few months ago to participate in Beijing’s fledgling public-private partnership program, which aims to breathe some entrepreneurial spirit into big state-run firms by selling stakes in them to more nimble private companies.
The program certainly looks good in theory, as state-run giants like Unicom are perennial dinosaurs, moving slowly and often only making major changes when prodded by their industry regulator. But the reality is that Unicom is a bit of a management basket-case, which in my view has made it the least attractive of China’s big 3 telcos. Until it can fix that problem, I really don’t see any major room for improvement at the company, even if it sells small stakes to better-run partners like the BAT.
All that said, let’s take a look at the latest developments, which began with rumors this week that Unicom had finalized a plan after being selected to participate in Beijing’s public-private partnership program. The rumors said that one or more of the BAT were part of the proposal. (English article; Chinese article) Unicom responded by issuing its own statement, saying that its pilot plan had yet to obtain final approval. (company statement)
Observers have interpreted Unicom’s statement to mean that an actual plan has been crafted, and is now in the final stages of discussion with Beijing, which may ask for changes before giving it the final green light. Unicom has announced major new partnerships with all 3 of the BAT over the last few months, leading observers to speculate that each of those will serve as the basis for future collaboration under a final public-private plan.
This actually wouldn’t be the first time Unicom has found a strategic partner through cross-ownership. The company previously counted South Korea’s SK Telecom (Seoul: 017670) as a strategic partner, and sold a stake of itself to the telco. More recently it sold 10 percent of itself to Spain’s Telefonica (Madrid: TELF). But neither partnership ever produced any meaningful results, and SK Telecom sold off its entire stake, while Telefonica currently holds a tiny 1 percent after selling off most of its holdings. (previous post)
Unicom wasn’t the only one to try such a partnership, as industry leader China Mobile (HKEx: 941; NYSE: CHL) also tried a failed equity tie-up with European giant Vodafone (London: VOD). All of those pairings failed because the Chinese telcos had no real interest in serious collaboration, since they operated in a highly protected home market where they had little or no incentive to improve.
Fast forward to the present, where the regulator is trying hard to change the telcos’ moribund mindset. It has rolled out a virtual network operator (VNO) plan that allows private companies to offer wireless service by leasing capacity from the big 3 telcos. It has also formed a fourth new telco by merging most of the nation’s local cable TV companies. But none of those plans seems to be having much effect, at least not yet, and the big 3 telcos still aren’t feeling much pressure to improve.
All that brings us back to the question of whether the reform plan will succeed where previous Beijing efforts to invigorate the industry have failed. As I’ve said above, I really doubt this plan will have much effect, even though all of the BAT are far more nimble and innovative than Unicom, or any of the other telcos for that matter.
The bottom line is that Unicom is a very poorly managed company, and it is only participating in this program because it’s being forced to by Beijing. Since it has no choice but to go along with the plan, it’s trying to draw as many big names into its scheme as possible, most likely to draw attention to itself and perhaps pump up its share price. But little or nothing will change at the end of the day, and these new partnerships will end up mostly as empty gestures.