Telefonica divests China Unicom stake

Spanish telecom operator offloads half its stake to fund acquisitions in Europe and Latin America.

Asia's third largest overnight block trade of the year was completed on Monday when Telefonica Internacional sold a 2.5% stake in China Unicom raising $859 million. The Spanish telecom operator halved its existing 5% stake to fund acquisitions in Europe and Latin America.

It picked a fairly opportune time as Chinese telecom stocks have been on an upswing since late October. This momentum will also have been attractive to investors, particularly those who believe China Unicom deserves to be re-rated after underperforming its peers all year. 

Pricing came at HK$11.14 - a 3% discount to the stock's HK$11.48 close according to a termsheet seen by FinanceAsia. This was the widest end of a 1.2% to 3% discount range marketed by sole lead, Bank of America Merrill Lynch.

Telefonica will now be subject to a 90-day lock up for the deal, which represented 15.3 days trading volume.

Allocations had not been released as FinanceAsia went to press, but observers report a fairly concentrated order book, with a mix of new and existing investors.

Year-to-date, Unicom is down 1.1% and has underperformed both China Mobile (up 20% so far this year) and China Telecom (up 23%). Unicom first showed positive momentum in mid March after investors started bottom picking across all Chinese equities and hit a year-to-date high of HK$14.22 in early September.

Like most Chinese stocks it had a difficult September, before starting to climb from a HK$10.92 low on October 23. It is currently trading at around 14.5 times 2015 earnings.

This represents a discount to China Mobile, which is trading at around 15.5 times, but a premium to China Telecom, which is trading at around 13.8 times. China Mobile has leapfrogged Unicom in valuation terms in 2014 following years of underperformance as a result of being forced to develop a home-grown 3G technology, which did not conform to international standards.

However, since becoming the first operator to be awarded a 4G licence last December, China Mobile has embarked on an aggressive roll-out and is targeting the installation of 700,000 base stations by the end of the year. This is equivalent to almost 80% of its existing 2G network, China's largest.

Unicom and Telecom both received their 4G licences in the summer, but Unicom has said it will not embark on heavy capital expenditure. Instead, it is overlaying its existing 3.75G network with 4G hotspots.

Some analysts believe this should be an important share price driver since Unicom is spending far less capex than Mobile and still has a competitive advantage from faster data download speeds. 

The company's recent third-quarter results revealed a 5.3% year-on-year increase in service revenues to Rmb186.8 billion ($30.5 billion). However, cellular service revenue fell 3.6% year-on-year, although this was less severe than Mobile's 4.6% decline.

Analysts have attributed this downward pressure to the recent introduction of VAT and the government's sanction against handset subsidies. The three operators have been forced to switch to airtime discounts, although analysts say Unicom still uses the words handset subsidy in its promotional material. 

In a recent research report, Credit Suisse also suggested Unicom will benefit from the government's decision to establish a State Tower Company. The company has always been an enthusiastic supporter of the plan to hive off the operators' passive infrastructure into a separate company.

The investment bank believes this could unlock significant value and boost Unicom's current valuation by $8.3 billion. This calculation is based on Unicom receiving one third of the industry's projected $25 billion in savings from the pooled infrastructure.

Unicom currently has 551,000 base stations, which Credit Suisse values at $37.7 billion.

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