China Unicom's new investors are facing a double whammy. Not only are they being asked to bail out a failing state telecom provider, they're paying a steep price for it.
The $11.7 billion deal, which attracted our skepticism Wednesday, is oddly structured. There are two transactions. First, the Shanghai-listed shares of China United Network Communications Ltd. will absorb 65 billion yuan ($9.8 billion) of new money from private investors at 6.83 yuan apiece, an 8.6 percent discount to the last closing price. In Part 2, yet to be detailed, all that A-share funding will flow into Unicom's Hong Kong-traded shares -- China Unicom Hong Kong Ltd. -- via placements or cheap loans.
Why don't the newcomers, including Tencent Holdings Ltd., Baidu Inc., Alibaba Group Holding Ltd. and JD.com Inc., invest directly in the so-called H shares?
Unicom Group, the state-owned parent of the listed units, is smart -- it's raising money selling higher-priced assets to buy cheaper stock in Hong Kong. On March 31, the last day the A shares traded, they were valued at a whopping 115 percent premium over their H siblings, Bernstein Research estimates. While the H shares have been bid up since the Shanghai halt, the mainland stock was still 78 percent more expensive.
In January, the A-share premium widened to as high as 148 percent. Foreign investors were worried that Unicom was ceding new wireless subscribers to the market leader China Mobile Ltd., while Chinese investors just played the "mixed ownership reform" theme.
Unicom Group's gain is private investors' loss. Among the 14 new backers, the big four tech companies will together chip in 27 billion yuan, while China Life Insurance Co. will inject 21.7 billion yuan.
The one advantage of the A-shares is that these investors can get board seats. After the restructuring, there will be four directors representing private investors (probably Baidu, Alibaba, Tencent and JD.com); six from state-owned entities, including Unicom's own management; and five independents.
This will help the investors, but the state will still have more say. And let's not forget that the tech companies are sometimes fierce competitors, and may end up squabbling.
Bernstein Research downgraded China Life Insurance on Thursday. Analyst Linda Sun-Mattison wrote:
This backdoor equity raising by Unicom H shares appears to be, in our view, the beginning of a new national service era when companies with large balance sheets and/or strong profits are summoned to help struggling SOEs at a dizzy valuation level.
I couldn't agree more.
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