China Telecom will pay upwards of $8 billion to use its state parent's newly acquired wireless network over the next three years, as the country's largest fixed-line carrier hitches a ride into a mobile arena now dominated by China Mobile Ltd.
The Hong Kong-listed firm agreed in June to fork over 43.8 billion yuan for the customers and business of Code Division Multiple Access (CDMA) owned by the Unicom group, as part of a government-led shake-up of the world's largest telecoms industry.
Its state-run parent of the same name agreed to pay 66.2 billion yuan for the CDMA network, once regarded as a cheaper alternative to China Mobile's Global System for Mobile Communications network.
Now, the listed firm intends to pay as much as 59 billion yuan ($8.64 billion) from 2008 to 2010 to piggyback the slice of the network it does not own. For full details please click http://www.hkexnews.hk/listedco/listconews/sehk/20080728/LTN20080728008.pdf
Unicom, which said in a separate statement on Monday that it expects to book a pre-tax gain of 37.56 billion yuan from the network sale, will use the proceeds to expand its own GSM network and pay off debt. Analysts said China Telecom chose to lease the network instead of buying it outright to shield itself from further margin erosion, as the perennially underperforming network is expected to dilute earnings per share. "Only after the network starts showing clear outperformance will the company think about acquiring it," said Daiwa Institute analyst Marvin Lo.
China Telecom shares ended the morning up 1.2 percent, outpacing slightly the market's 0.3 percent gain. Lo added that should happen after both firms upgrade it to the third-generation version as mandated by Beijing's industry restructuring blueprint, allowing faster Internet access and multimedia services.
China Telecom had planned to issue up to 80 billion yuan ($11.7 billion) worth of bonds to bankroll the acquisition. Under their agreement, China Telecom will lease the CDMA network from its state-owned parent at a fee equal to 28 percent of CDMA revenues for each year from 2008 to 2010, up to a total of 59 billion yuan ($8.64 billion).
It said in a statement on Monday that the maximum lease fees payable for the period ending in December of 2008, 2009 and 2010 was expected to be 4 billion yuan, 20 billion yuan, and 35 billion yuan, respectively.
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