China Unicom (Hong Kong) Limited (CHU) has announced plans to purchase 100% stake in Unicom New Horizon Telecommunications Company Limited from the parent company China United Network Communications Group Company Limited, aka, Unicom Group. China Unicom will pay 12.2 billion yuan or U.S$1.9 billion for the “proposed acquisition”.
The to-be acquired assets include fixed-line telecommunications network across 21 southern China states and cities, which are currently under lease with Unicom Group. The lease will expire on December 31, 2012.
According to China Unicom, this acquisition will boost its earnings and unlock greater long-term value for its stockholders. With the completion of the deal, all the domestic fixed-line telecommunications business and assets of state-controlled Unicom Group will be incorporated into China Unicom. This will result in improved organization planning and greater operational and management efficiency for China Unicom, giving a competitive edge over its peers.
The deal is expected to be closed by the end of 2012, subject to approval from the shareholders of China Unicom and other customary conditions.
Based in Beijing, China Unicom is the second largest wireless operator in the country, with 8.06% stake being controlled by Spanish Telecom giant Telefonica (TEF). China Unicom operates through two business segments: mobile business (56% of 2011 service revenues) and fixed-line business (44% of 2011 service revenues).
China Unicom currently holds a Zacks #3 Rank, reflecting a Hold rating for a period of 1-3 months. We also maintain our long-term Neutral recommendation on the stock.
We believe that the company will benefit from the ongoing development strategy that is aimed at enhancing its growth and profitability. China Unicom expects to generate higher revenues by accelerating large-scale developments of 3G and fixed-line broadband services.
Nevertheless, high levels of marketing and promotional expenditures will likely hamper the company’s profitability in the future. Further, we remain concerned about the precipitous decline in the landline business as well as intense competition in the domestic wireless market.