China Mobile to buy 12% of Far EasTone

As cross-strait relations warm up, China Mobile agrees to pay $528 million for a strategic stake in the Taiwanese mobile operator.

China Mobile yesterday announced that it has entered into an agreement to buy a 12% stake in Taiwanese mobile phone operator Far EasTone Telecommunications, worth NT$17.7 billion ($528 million). This is the first major deal between China and Taiwan since cross-strait relations started to thaw last year.

China Mobile will subscribe to 444 million shares at a price of NT$40 per share, a 15.3% premium to Tuesday's closing price of NT$34.70.

Underlying the transaction is a strategic agreement to cooperate in the development of both company's businesses, said China Mobile in a stock exchange filing. The areas of cooperation will include: joint purchases, roaming, data and value-added businesses and network and technology advancement.

A source close to the deal says that China Mobile is interested primarily in the strategic benefits, rather than control, and that the company is unlikely to try to increase its stake in the target.

In the filing, China Mobile said that the agreement will help the company expand its business in mainland China, Hong Kong and Taiwan, since it will be able to offer better services to its customers who are part of the growing traffic across the strait. Better transport links between Taiwan and the mainland are one of the most concrete outcomes from diplomatic relations that began to warm when Ma Ying-jiou became president of Taiwan last year.

Another benefit of the deal is technology. It will allow China Mobile to "better explore future technological trends in the mobile communications market and accumulate advanced technological and operational expertise in areas such as 3G and next generation technology, since Taiwan is in a more advanced stage of development in both 3G-technology applications and value-added services," the Chinese telecom company said.

Technology exchange relating to 3G is of notable importance to China Mobile since it has been tasked with laying down China's first high-speed mobile telecoms network.

Closing at NT$35.20 yesterday, Far EasTone's share price has recovered slightly from its 52-week-low of NT$31.30, last November, but is still well below last year's high of NT$52.80, putting it at a potentially attractive price for investors. As of the end of March, Far EasTone's largest shareholders were Yuan Ding Investment with 32.7%, and Japan's NTT DoCoMo with 4.7%, according to Bloomberg.

In a research note commenting on the Taiwanese telecom industry, released earlier this month, Goldman Sachs favoured Far EasTone as "the biggest laggard [year-to-date] of the 7%+ yield telco names in Asia". Later in the note, it says "we see room for [Far EasTone] to positively surprise on operations if it can stabilise its revenues while it has room to protect its bottom line, given NT$800 million of savings that it plans to realise this year from the New Century Infocomm (NCIC) and mobile network integration".

Goldman said it expects the target will suffer lower non-operating losses due to reduced equity exposure to NCIC as well as improved operational results of this unit.

In an industry overview published on April 20, Merrill Lynch reduced its ratings for the Taiwanese telecom sector. Although generally a defensive sector, the note said that the impact from the tough macroeconomic environment was taking more of a toll than initially expected. Far EasTone was dropped from 'buy' to 'underperform'; Taiwan Mobile went from 'buy' to 'neutral', and Chunghwa Telecom maintained its 'buy' status.

The Merrill report did highlight that the yields in the sector on expected 2009 earnings remained strong, though Far EasTone, with its 7.1% yield was the "least attractive among the three Taiwanese names given the firm's chronic inconsistent operational execution".

China Mobile is being advised by Goldman Sachs, while Far EasTone has not hired a financial advisor.

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