China Mobile to pay $10B for networks

China Mobile will have more subscribers than any other company after the buyout.

HONG KONG, May 16 (Reuters) -- China Mobile (Hong Kong) Ltd, the mainland's dominant cellular carrier, said on Thursday it will buy eight provincial networks from its state-owned parent in a $10.2 billion deal that will also increase the stake held by Britain's Vodafone Group.

The deal, which the carrier first signalled in December, will expand Hong Kong and New York-listed China Mobile beyond its current turf in 13 of China's wealthiest coastal provinces and is priced roughly in line with market expectations.

China Mobile will pay US$8.57 billion in cash, shares and a loan from its parent, and assume US$1.63 billion in debt in a deal to be completed by the end of June.

The eight central and western provinces to be acquired had 20.9 mobile customers as of April 20. China Mobile's existing territory had 69.6 million subscribers.

"This acquistion represents a further step in the implementation of our growth strategy to achieve nationwide dominance,'' said Wang Xiaochu, chairman and chief executive.

'Very attractive' valuation

He said now is an opportune time to buy networks, and called the valuation "very attractive given the quality of these assets.''

Bear Stearns analyst Jonathan Shaw said, "I think it's a good deal, and it's basically in line with market expectations.''

UK mobile phone giant Vodafone will pay US$750 million for 236.63 million new China Mobile shares at HK$24.72 each, increasing its strategic stake to 3.27 percent from 2.18 percent currently. The deal expands the tie-up between the world's two biggest mobile carriers.

Shares in China Mobile dipped 0.58 percent to close at HK$25.85 before the deal was announced to securities analysts in Hong Kong. The shares have gained more than 12 percent in the last month.

"I believe there is room for the share price to move up. How much, I cannot say,'' said Morgan Stanley analyst Mark Shuper.

China Mobile shares are more than two-thirds below the HK$80 level reached in early 2000, and many investors are skittish about the uncertain regulatory and competitive environment in the world's biggest mobile market.

Competition with sole rival China Unicom Ltd (0762.HK), which is permitted to undercut China Mobile's prices by 10 percent, is expected to intensify now that the smaller carrier has launched a CDMA standard network alongside its GSM system.

Reform of telco sector

China's two fixed-line giants China Telecom and China Netcom, which were both launched on Thursday as part of Beijing's broad reform of the telecoms sector, are expected to receive mobile network licences within 18 months.

Meanwhile, as cellphones penetrate more broadly into less-affluent ranks of China, per-user revenues are shrinking.

Vodafone said its investment will start to generate a cash return, as China Mobile has committed to begin paying dividends, starting in the financial year ending December 31.

"Vodafone needs the China connection in many ways to keep its whole story going and to keep its dream alive of being this global giant in mobile,'' said Peter Lovelock, director of Beijing telecoms consultancy MFC Insight.

China Mobile, which unlike most big telecoms carriers enjoys a net cash position, said the deal will be accretive to 2002 earnings by 2.7 percent after amortising goodwill.

The deal will swell the total capitalization of the enlarged China Mobile to 209 billion yuan from 141.1 billion yuan, China Mobile said in a presentation to fund managers and analysts.

The networks China Mobile is buying are in mostly less-affluent regions than its current territory, and include he provinces of Anhui, Hunan, Hubei, Jiangxi, Sichaun, Shaanxi, Shanxi and the massive city of Chongqing.

Morgan Stanley's Shuper said the new provinces are less profitable than China Mobile's current territory, and that the company will have its work cut out for it to lift the profitability level.