UK-based Vodafone agreed to pay $2.5 billion in cash for a stake in China's biggest mobile phone company. The company says it considers the investment a sound one in its own right, but that the main purpose of taking the stake is to build a preferential relationship with China Mobile that will lead to a greater equity stake later.
"We'd like to get as much of China Mobile as we can," said Vodafone chief executive Chris Gent at a press conference. "But we're looking at something towards the 15% to 20% range. We do want to increase our position but we have to earn it by showing what we can contribute."
China Mobile will use the proceeds of the sale to help pay an agreed $32.84 billion for seven mobile phone companies owned by its parent, China Mobile Communications, in Beijing, Shanghai, Tianjin, Shandong, Hebei, Liaoning and Guangxi. It will also assume the seven companies' joint net debt of $1.16 billion as of June 30, 2000.
China Mobile will pay $10.17 billion in cash for the companies and $22.67 billion in new shares. China Mobile Communications will retain its 75% stake in Hong Kong-listed China Mobile, which will have a market capitalization of about $130 billion once the acquisition are complete.
Gent said Vodafone sees its initial stake as the first step in a long term partnership that could lead to the companies jointly bidding for a third generation (3G) mobile phone license when they are issued in China towards the end of 2002.
Vodafone was selected to take the $2.5 billion stake from several bidders that included NTT Docomo and Deutsche Telekom. Vodafone says it hopes to bring to the alliance its experience in developing services in competitive markets as China prepares to open its own to competition from overseas.
As part of the fund-raising package, China Mobile will issue 4.1 billion new shares to the public and issue a $600 million convertible note. Both the share issue and the convertible note include a 15% overallotment option. The balance of the payment will be drawn from internal resources, or by offering less cash and more shares to its parent.
Based on those forecasts China Mobile predicts the seven companies' combined earnings before interest, tax and depreciation (EBITA) will be not less than $2.16 million under Hong Kong accounting regulations, while their combined net profit will be about $1,003 million. That puts the value per subscriber of the companies at $1,965 by year's end, or 15.7 times EBITDA.
The seven provincial companies will have about 17.3 million subscribers by the end of this year, according to China Mobile forecasts. They will bring China Mobile's subscribers to 41.2 million, and its market share to 55.9% from 34.3%. Vodafone has a worldwide customer base of 66 million. China had a total of 63 million mobile customers at the end of June, 2000, yet its penetration rate is just 3.4%
Vodafone says it and China Mobile will explore "suitable opportunities" for joint ventures with other companies involved in research and development of wireless data services, including investments in companies outside China.
"We've been trying for some time to find an appropriate way to enter the China market," says Gent. "This alliance with China Mobile represents a critical step in our strategy in Asia."
Vodafone has been burned before in trying to build a presence in Asia. It has taken small stakes in several companies, only to find itself unable to step up the investment or to get out of it when they want. The company is currently trying to sell its 11.7% stake in Shinsegi Telecom, Korea's third biggest mobile phone company, and it can't upgrade its stake in J-Phone, Japan's third largest mobile phone company, though it would like to.
Still, Vodafone is banking on China's adhering to its promises once it enters the World Trade Organization. On accession to the WTO foreign companies will be able to acquire 25% of China's telecom companies. That rises to 35% after five years and 49% after six years.
Vodafone's move follows a similar strategic investment in China Unicom, the country's second-biggest mobile phone company, by Hong Kong tycoon Li Ka-shing's ports-to-retailing conglomerate Hutchison Whampoa. Hutchison paid $400 million for a roughly 2% stake as part of Unicom's initial public offering in New York and Hong Kong earlier this year.
A roadshow to build interest in China Mobile's share sale is tentatively scheduled to begin October 16. Goldman Sachs, Merrill Lynch and China's foremost investment bank, CICC are managing the sale.