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Who Wins and Loses If China Creates a New Mobile-Phone Giant

2018-09-06 14:04

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The prospect of a merger between China’s second- and third-largest mobile carriers sent shares in China Tower Corp. plunging for a second day Wednesday, as investors bet the infrastructure operator would lose out in a potential deal that could help realize the country’s 5G ambitions.
A proposal to merge China United Network Communications Group Co. and China Telecommunications Corp. is being reviewed by the country’s top leaders, people familiar with the matter told Bloomberg, as Beijing seeks to secure an edge over the U.S. on 5G, the high-speed wireless technology set to revolutionize how we use everything from home appliances to cars.
But such a deal -- which has not yet been decided and may not come to pass, say the people -- would have some fallout beyond the U.S.-China relationship, which has deteriorated in part because of concerns over China’s claim to a high-tech future.
Here are some of the potential winners, and losers, of a merger that could create a mobile carrier second only to the giant China Mobile Ltd. in scale, and whose Hong Kong units have a combined market value of more than $77 billion:
1. China Tower: The Infrastructure Provider
Newly listed China Tower Corp., which effectively runs all of the country’s mobile-phone towers, plunged as much as 10 percent on Wednesday morning, to HK$0.99, a record low, after dropping 6.8 percent Tuesday, as the company could bear the brunt of a less competitive landscape.
The fortunes of the company, the world’s largest operator of phone towers, largely depend on how many carriers use its structures -- a measure that analysts track and refer to as the "tenancy ratio."
If China decides to have two wireless carriers instead of three, the company "will almost certainly have fewer tenants on its towers" and this is "inevitably negative," according to Jefferies analyst Edison Lee.
2. ZTE, Huawei: The Equipment Suppliers
Similarly, China’s top telecommunications-equipment makers could also take a hit from a merger since they’d be supplying to one fewer customer, according to Samuel Chen, an analyst at Sanford C Bernstein. One of the consequences of a merger would be that the combined carrier would cut down on redundant investments or costs.
If so, it would be the latest in a string of setbacks for the pair. The U.S.’s recent temporary export ban on ZTE Corp. nearly crippled the company because of its reliance on American technology.
Also, Huawei Technologies Co., the world’s largest maker of equipment for phone networks, and ZTE were banned last month from selling their gear to a U.S. ally, Australia, which cited security concerns. Huawei and ZTE, which aren’t able to sell their network gear to U.S. carriers as well, have denied they represent any such risk.
3. China Mobile: The Biggest Player
Conversely, industry leader China Mobile Ltd. may stand to benefit from the merger of its two smaller rivals if it leads to lighter competition.
The Chinese government, which has been applying policies favoring the smaller carriers to keep them competitive, would have less of an incentive to do so if the merger happens, said Lee at Jefferies. China Mobile may even be awarded more favorable airwaves to build out its network, according to Lee.
Big Three
China Mobile has a dominant share of mobile phone users

Source: Bloomberg Intelligence
4. Tencent, Alibaba: The Investors
Chinese internet giants Tencent Holdings Ltd. and Alibaba Group Holding Ltd. were among a slew of Chinese companies that participated in a 78 billion yuan ($11.4 billion) share sale of Shanghai-listed China United Network Communications Ltd. last year as part of a government push to have private companies buy into state-owned enterprises. China United is technically the direct parent of China Unicom (Hong Kong) Ltd. but both companies are part of the broader Unicom Group.

Should China United’s shares rise over optimism about a merger, it would provide the investors with a chance to recoup their losses -- the stock has fallen 19 percent since they bought in.
Shanghai-listed China United shares rose as much as 4.7 percent on Wednesday morning, their first trading since news of the potential merger broke. Hong Kong-listed China Unicom fell 0.9 percent as of 10:25 a.m. in Hong Kong, while China Telecom Corp. dropped 0.8 percent to HK$3.86.
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