Managed Services

China Telecom Plans Euro M&A

China Telecom Corp. Ltd. (NYSE: CHA) is one of the world's biggest carriers, with 181 million voice lines, 58 million broadband customers, 75 million mobile subscribers, and US$7.8 billion in quarterly revenues. It's a giant in its domestic market.

In Europe, though, it's a minnow.

China Telecom Europe was formed in 2006 as a provider of wholesale capacity to operators looking to connect to the Far East, such as BT Group plc (NYSE: BT; London: BTA), and as a comms services supplier to the overseas operations of Chinese companies. It currently has 10 points of presence (POPs) in Europe and is on course to generate revenues this year of around £11 million ($17.2 million) from its wholesale capacity and managed services portfolio.

But the division's managing director, Mr Yan Ou, is an ambitious man. He wants his outfit to be the "carrier of choice for enterprises looking to reach China," whether those enterprises are Chinese or not.

He aims to do this by adding more POPs, expanding his network -- which currently includes a terrestrial backbone running from Stockholm and across Russia to China -- and finding more partners. Its current partners include Telia Carrier , T-Systems International GmbH , and Tinet .

But Mr Ou's strategy also includes acquisitions. "We are looking to buy an EMEA ICT [Information and Communications Technologies] company to give us a recognized brand and ICT services to go with our transmission services. We are looking for a good target," says Mr Ou, who notes that he is also reaching into the Middle East with an office in Dubai, and into South Africa too.

So does he have a budget, a maximum amount he can spend? He says there is no limit on the price, but also no rush. "It needs to be the right company at the right capitalization at the right time."

Mr Ou may need to move fast, though, if Ovum Ltd. principal analyst David Molony is right. He believes there could be a rush towards telco/IT M&A deals following NTT Group (NYSE: NTT)'s recent swoop on Dimension Data and the Japanese giant's ongoing international expansion. (See NTT Splashes $3.2B on DiData and NTT Buys More Euro Smarts.)

"NTT's Dimension Data deal has set the cat amongst the pigeons. The telco/IT pairing has been a tale of caution so far, and the carriers have been holding off. Now the NTT deal shows that if you're looking to get into the global services market, then you'd better hurry up. Acquisitions will be the way to achieve that aim, as building organically takes a long time," says the clean-shaven Molony.

"China Telecom Europe has a lot of catching up to do. This looks like a five-to-10-year strategy, but they will have to get a move on," urges the analyst.

He notes that for China Telecom Europe to get what it wants -- data center space, contact center space, running hosted VoIP and virtual PBX capabilities, offering manage services -- they will need a "DiData sort of deal."

But who is out there for sale? Molony notes that Tieto Corp. has "a nice business," and that Logica fits the bill in that it's big in Europe (though could be a bit pricey, in the billions). Also, parts of the Fujitsu Consulting empire might be available for sale.

Molony adds that there are "a lot of unattached local integrators in specific markets. It's possible China Telecom Europe could build a business by picking up some services companies in a few major markets such as Germany and France."

If price really isn't a limitation, this could get very interesting, especially if other players in Europe are looking at the same prey.

— Ray Le Maistre, International Managing Editor, Light Reading

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