China's Complicated Telecom Mergers (CHU, CN, CHA, QCOM)

There is a complicated merger in the Chinese telecom market, which is part of the government mandate to consolidate a fragmented telecom industry in China.

China Unicom Ltd. (NYSE: CHU) has formalized a deal that came out over the weekend to acquire China Netcom Group Corp. (NYSE: CN) in a deal that puts the debt and equity value around $56.3 Billion.  In a separate deal, China Telecom Corp. (NYSE: CHA) will acquire China Unicom parent’s CDMA network for roughly $15.86 Billion in cash.  China Netcom will be delisted and will become a wholly-owned subsidiary of China Unicom.

Recently, China’s government had mandated a restructuring of the country’s six major telecom operators where these will become three entities.  Interestingly enough, China believes that the more consolidated players will create more competition and prevent any single carrier from a winner take all position. 

China Unicom is the major CDMA service provider in China, and it has some 42 million subscribers as of the end of 2007.  Because these stocks were all tied up in a coming deal, some of the shares had been halted on local exchanges while these terms were being worked out.

While it may be hard to interpret or play play the consolidation waves in China’s telecom mergers, one winner of this merger will likely be Qualcomm Inc. (NASDAQ: QCOM) because it wins on every new CDMA user it gets.  This of course assumes that the other deals don’t take away from the company’s CDMA and WCDMA user base, and that is not necessarily an assured outcome.

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Jon C. Ogg
June 2, 2008