China’s telco overhaul is oddly engineered

A Chinese telecom overhaul is oddly engineered. Hong Kong-listed China Unicom on Wednesday outlined plans for a $12 billion infusion from heavyweight backers including various local technology giants. This is a flagship case of what Beijing terms “mixed ownership” reform. It is not, however, all that it’s cracked up to be.

China Unicom and other state enterprises could use more equity and less debt. With the new cash from Tencent, Baidu, Alibaba and others, it will now be in position to invest more in superfast mobile broadband projects. The new partners also probably can teach China Unicom a thing or two.

The deal is fraught with problems, however. First, the money will flow into Shanghai-listed China United Network Communications. Amid the company’s tortuous ownership structure, that division indirectly owns one-third of the Hong Kong unit by way of an offshore entity.

The second oddity is that some money is actually public, thus weakening the argument that the arrangement will somehow introduce more private sector discipline. The biggest buyers are China Life, which answers to the Ministry of Finance, and China Structural Reform Corp.

This state duo aside, the others will get about 19 percent of the Shanghai business. They also will get four of 15 board seats there, analysts at Jefferies reckon. That is better than nothing, but keeps them one step removed from the action.

The Shanghai business nevertheless will pass on the cash, probably in exchange for stock. Its control of the Hong Kong unit therefore could increase to nearly half, a Breakingviews calculation suggests. Even then, though, the new private investors would effectively own less than a tenth of China Unicom.

Industry precedents are discouraging, too. Vodafone , SK Telecom and Telefonica all at one point held stakes and inserted directors at Chinese telecom operators, but had little sway and ended up selling out.

It does not at all seem like “a very monumental step in the economic development” of China, as Tencent boss Martin Lau told investors. The state’s grip isn’t loosening much and it looks as if the prestigious backers were prodded. Lau said he was “honoured” to take part. And yet he and his peers almost certainly have better uses for their capital.

CONTEXT NEWS

Unicom Group, one of China’s three big state-owned telecom operators, is raising 78 billion yuan ($11.7 billion) of new capital from the country’s technology giants and other sources, one of the company’s units said on Aug. 16.

As part of an official drive dubbed “mixed-ownership reform,” a mix of public and private investors will buy 61.7 billion yuan of new shares and 13 billion yuan of existing shares in the company’s Shanghai-listed unit, China United Network Communications. These buyers will get 35.2 percent, while employees will pay 3.2 billion yuan for 2.7 percent.

Companies including Alibaba, Baidu, Tencent, and JD.com are investing alongside China Life, the insurer controlled by China’s Ministry of Finance, and the China Structural Reform Fund Corp.

The Shanghai unit then plans a capital injection into its Hong Kong-listed affiliate, China Unicom (Hong Kong), the latter said. This could be via a private placement, a rights issue, or another route. The Shanghai unit indirectly owns 33.3 percent of China Unicom HK through another offshore outfit, Unicom (BVI).