Another piece of China's broadband reform has fallen into place with China Mobile's acquisition of the core assets of fixed-line provider TieTong for 31.88 billion Chinese yuan ($5.15 billion).
The acquisition gives China Mobile Ltd. (NYSE: CHL) 12 million fixed broadband and 18 million voice customers as well as a 99,000km backbone network and 1.8 million cable kilometers of metro fiber.
China TieTong Telecommunications Corp. has actually been affiliated with China Mobile since parent company China Mobile Communications Corp. absorbed it during the last industry reorganization in 2008. But the integration of TieTong into the mobile operator will simplify the management of its assets, including the need to comply with cumbersome connected transaction rules, and provide a platform to challenge broadband incumbents China Telecom Corp. Ltd. (NYSE: CHA) and China Unicom Ltd. (NYSE: CHU), according to China Mobile.
It is also one of a number of government moves this year to improve the speed and quality of China's broadband infrastructure. Under pressure from frustrated consumers and economic planners wanting to build an Internet economy, telecom regulator MIIT has repeatedly told operators they need to improve speeds and reduce prices.
Early this year, the ministry issued pilot licenses to four privately owned companies -- the first private players allowed into the infrastructure market in PRC history -- allowing them to build broadband access networks.
However, it could be a while before consumers see any benefit from the TieTong sale. As pointed out by the respected finance website Caixin: "In the eyes of investors, TieTong is not a quality asset and is probably still a loss-maker."
China Mobile is paying a small premium for the business. The assets it is acquiring are valued at RMB53.1 billion ($8.3 billion) and TieTong's debt is RMB23.1 billion ($3.6 billion), implying a net value of RMB29.96 billion ($4.7 billion), or RMB1.92 billion ($300 million) below the purchase price.
TieTong has not published its full financial details, and, although it is achieving healthy EBITDA margins of more than 30%, its debt absorbs virtually all of its profits. It posted net income last year of just RMB10 million ($1.56 million) yuan on revenue of RMB23.3 billion ($3.64 billion).
Another problem seems to be its bloated workforce. TieTong's 47,000 staff last year generated RMB496,000 ($77,500) per employee. By comparison, broadband leader China Telecom posted revenue of RMB324 billion ($50.6 billion) in 2014, or RMB1.08 million ($170,000) from each of its 300,960 employees.
TieTong began life as the telecom subsidiary of the Ministry of Railways (MoR) in 2000, selling capacity on its extensive fiber networks. It was transferred to the state asset management company SASAC in 2004. After being sold four years later to the China Mobile Communications Corp, its railways assets were returned to the MoR.
Without an access network it has never been more than a niche provider. Now it is has the market heavyweight fully in its corner, that may change.
— Robert Clark, contributing editor, special to Light Reading