Unicom's double standards show the weakness of its support

Hutchison Whampoa''s investment in China Unicom comes at a time when institutional investors should be buying the stock.

The news that Li Ka ShingÆs Hutchison Whampoa flagship is taking a $400 million, 2% stake in China Unicom should come as no surprise. It is an astute investment by a well-connected firm at a time when valuations for telecom plays look compelling. From LiÆs point of view, it gives him huge kudos with the Chinese leadership û as if he needed any more û and immediate access to the immense possibilities of the Chinese telecom market.

But here lies the problem with this announcement. China Unicom has spent the past 12 months in a bruising battle with 40-odd international phone companies, disentangling itself from a series of joint ventures, which the central leadership in Beijing said were illegal. These joint ventures were structures under the CCF principal. In essence this meant that the foreign firm formed a joint venture with a Chinese window company. This JV then formed a new JV with Unicom and undertook telecommunications operations in the mainland.

Beijing decided these were illegal as they gave the foreign firms too much control and even ownership of mainland telecom assets. The unwinding of these CCF contracts has been extremely painful for all concerned. The foreign telecom firms û including Deutsche Telecom, France Telecom and NTT û have been offered pitifully low levels of compensation and bribes of cheap equity at China UnicomÆs IPO.

But getting back to Li. HutchisonÆs investment in China Unicom will be in the listed vehicle in Hong Kong. At the same time, Hutch has entered into a agreement with China Unicom in China to do joint venture telecommunication work in the mainland. Ring any bells? What was only recently declared illegal in China is now being done again. Only this time, as it is Hutchison and Li Ka Shing, and not some dastardly US or European firm, this deal appears to be allowed to go ahead. One can only marvel at the connections that Mr. Li must have.

Going further, it seems strange that Li should need to come in on the deal in the first place. After all, the dealÆs book runners û Morgan Stanley and CICC û have been falling over themselves to report how much demand there is for the deal from institutional investors û who are usually the intended purchasers of shares at an IPO. Could it be that really the deal is struggling to find support among the institutions? Or could it be that with a fixed number of shares to be sold and a tied and incentivized fee structure, MSDW is just determined to build the entire book so they can scoop the near $200 million in fees on offer and block out the rest of the selling syndicate? Whatever the more grubby consequences, the move again highlights the skill of Li Ka Shing in getting a good deal, and the malleability of Chinese rules when it comes to international finance.

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