China Tower Transaction: Unicom Gains Most In Interim, Telecom May Be Long-Term Winner

Additional details have emerged relating to the formation of and asset transfer to the China Tower joint venture, which will pool wireless infrastructure assets of the big three Chinese carriers – China Mobile (NYSE:CHL), China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA). China Unicom’s stock reacted the most positively to the developments, rallying by close to 15% over the last three days, as investors see the carrier as unlocking the most near-term value via the transaction. China Telecom, the smallest Chinese wireless player, also saw decent gains, with the stock rising by close to 10% through Wednesday. In this note, we take a look at the structure of the new entity and the specific impact on the two smaller carriers.

Our $15 price estimate for China Unicom is almost in line with the current market price. Our price estimate of $60 for China Telecom, is about 10% ahead of the current market price.

See our complete analysis of China Mobile | China Unicom | China Telecom

Details Of The Joint Venture 

The three carriers will pool their telecom towers and related assets, worth a total of 213.9 billion yuan ($33.71 billion), into the newly formed entity, in a transaction that will be settled via the issuance of stock and cash. China Mobile will inject tower assets totaling 116 billion yuan in return for a 38% stake, noting that it expected to realize a gain of 19.5 billion yuan. ^[1] China Telecom will contribute 34.3 billion yuan worth of assets for a 27.9% stake, realizing a 5.13 billion yuan gain. China Unicom will transfer assets worth 63.2 billion yuan for a 28.1% stake, realizing 9.68 billion yuan in gains. ^[2] Additionally, China Reform Holdings, an investment firm responsible for revamping state-owned enterprises, has agreed to inject about 8.1 billion yuan in cash into the new entity, in return for a 6% stake.

China Unicom Gains Most In The Interim As Sale Unlocks Value

China Unicom’s stock has been weighed down over the last few quarters on account of its sluggish 4G rollout. The carrier has a market cap of roughly $33 billion, while smaller wireless rival China Telecom currently has a market cap of $42 billion. However, the carrier’s wireless infrastructure assets are significant, holding over 190,000 towers compared to China Telecom’s 125,000 towers. ^[3] Adjusting for differences in market cap, the gains that Unicom will realize from the transfer of assets will be significantly more than those of the other two carriers, unlocking value for shareholders. Unicom expects to record a gain of 9.7 billion yuan, while Telecom expects to realize a 5.13 billion yuan gain. Moreover, as indicated in the table above, the deal is structured such that Unicom will be receiving a sizable portion of its compensation in cash (25.4 billion yuan). This should allow the carrier to ease its liquidity position and bolster its struggling 4G campaign with better coverage and promotional offers.

China Telecom Gains From Tower Sharing, Equity Play 

China Telecom could potentially reap the most meaningful benefits over the long-term for two reasons. Firstly, being China’s smaller wireless carrier, Telecom will get a chance to improve its network coverage by sharing the more expansive networks of China Mobile and China Unicom, without having to incur significant capital outlays, while also alleviating any shortage of prime sites for its 4G services roll-out. The carrier holds just 125,000 towers versus the 450,000 and 190,000 towers held by larger rivals China Mobile and China Unicom. Secondly, the carrier has taken a meaningful percentage of its compensation in terms of equity in China Tower, rather than cash. Unicom and Telecom each hold roughly 28% of the joint venture, despite Telecom’s transferred assets being valued at about 45% less than Unicom’s. This equity-focused play could allow the carrier to realize a significant upside if the tower joint venture is successful.

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1. China’s telecom carriers to put $33.7 bln tower assets into new firm, Reuters, October 2015 [↩]
2. China Unicom Press Release [↩]
3. Why China Unicom Benefits The Most From Tower Reform, MarketWatch [↩]