Alibaba, Tencent, Baidu and 11 other companies are investing USD 11.7 billion in telecom operator China Unicom’s share sale. Altogether, these investors will purchase 35% stake at a price of CNY 6.80 per share, the unlisted stake held by Unicom will decrease from 62.7% to 36.7%. State-owned China Life Insurance will become the largest shareholder among these new investors with 10.22% share.
Chinese government aims to rejuvenate state-owned enterprises with private capital
Since 2015, the Chinese government has been pushing for a mixed ownership reform program, which allows private capital to invest in state-run enterprises. The program aims to rejuvenate the state sector by providing new capital and creating a more results oriented business to deliver shareholder returns and potentially open up their industries to more competitive dynamics. According to the National Development and Reform Commission (NDRC), the government has selected 40 state-owned groups to implement the mixed ownership program initially, and will further open up the reform program to more state-run enterprises in Q3 and Q4 2017. China Unicom is one of the most significant companies involved and as such its ownership restructure highlights the progress and ambitions of this program.
The investment will strengthen China Unicom’s position
China Unicom is the second largest state-owned telecom operator in China and reached 269 million mobile subscribers and almost 75 million fixed broadband subscribers in Q2 2017. However, its operating revenue decreased 1% and net income fell 94% year-on-year by the end of 2016, whilst rivals China Mobile and China Telecom reported an increase in operating revenue of 6% and 6.4% respectively. Although China Unicom cut costs and improved net profit in Q1 and Q2 2017, it is facing increased competition from China Mobile and China Telecom. The investment will facilitate an upgrade program that will allow China Unicom to improve operational efficiency and strengthen its 4G capabilities, develop 5G related technologies and leverage these platforms to expand innovative businesses such as mobile payments, IoT and cloud computing.
E-commerce and tech companies step up to influence state-owned businesses with limited power
In addition to Alibaba, Tencent and Baidu, other major investors include online shopping platform JD.com, Suning, ride-hailing company Didi Chuxing, state-controlled China Life Insurance and the state rail company CRRC Corp. This indicates the influence of tech companies and e-commerce platforms is increasing while continually driving economy growth in China. Investors may seek to leverage their new relationship with Unicom. This could include driving their own products into the Unicom services ecosystem and pre-installing apps on handsets to increase user adoption. Tencent has previously partnered with China Unicom to launch a broadband card giving unlimited data usage on Tencent apps.
However, compared to the state-owned investors, these tech brands will each have a relatively small stake in China Unicom. This means China Unicom remains state controlled and these tech investors will have limited power to influence organisational reform. And while the mixed ownership program is showing some privatisation dynamics, this effectively brings these e-commerce companies closer into the government’s control.