September 5, 2018 / 6:18 AM / a year ago

Breakingviews - China 5G ambitions cross wires with M&A logic

A electric rickshaw driver uses a mobile phone as he takes a break in Beijing, China June 3, 2017. REUTERS/Thomas Peter

HONG KONG (Reuters Breakingviews) - China’s 5G ambitions will cross wires with M&A logic. Beijing might merge state-owned wireless carriers China Unicom and China Telecom to create a $70 billion-plus telco giant – and a market duopoly. Consolidation could accelerate the development of ultra-fast networks, but industrial policy goals will limit the financial benefits.

Speculation of a merger between the country’s number two and three operators have circulated for years. A combination would produce a stronger challenger to the market leader, the $198 billion China Mobile. Recent trade and security tensions with the United States have put Beijing’s goal of dominating the global race for next-generation 5G wireless technology at risk. Top leaders are now reviewing a proposal for a merger, Bloomberg reported on Sept. 4, citing sources.

Combining China Unicom and China Telecom’s resources to build a single network would be more efficient. There is precedent for cooperation: in 2016, the pair teamed up to jointly build and share certain 4G networks to cut costs. A coordinated focus on 5G could push China Mobile to be more aggressive too. The rationale is similar to the one behind T-Mobile’s $26.5 billion acquisition of Sprint: boss John Legere is pitching regulators that the combined company will “propel” rivals AT&T and Verizon to be more active developing 5G, according to U.S. Commerce Secretary Wilbur Ross.

The two U.S. carriers reckon at least $6 billion in cost savings resulting from a tie up, which they value at $43 billion today. But it’s hard to see China’s state-owned enterprises wringing out such synergies. Bernstein analyst Chris Lane notes similar mergers have resulted in 30 percent workforce reductions elsewhere; in China Unicom and China Telecom’s case, that’s roughly 160,000 people - a move that will be politically unpalatable for Beijing. Nor do the two have compatible legacy networks, another limit on operational cost savings.

Beijing’s rush to roll out home-grown technology at cheap prices, then push widespread adoption, will probably come at the expense of the mobile carriers’ already-battered bottom lines. Their shares trade at enterprise values roughly three times expected EBITDA for the next 12 months - nearly half of what global peers like Vodafone and Verizon trade at. M&A without financial perks will not close this gap.


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