China Telecom (Hong Kong) Limited says it is in talks to acquire seven mobile phone companies from its parent, China Mobile Communications. The move would boost its subscriber base by 56% to at least 32 million and increase its attractiveness to potential partners once China enters the World Trade Organization.

China's biggest telecommunications company plans to acquire mobile phone companies in Beijing, Tianjin, Shanghai, Liaoning, Hebei, Shandong and Guangxi. China Telecom says it has not settled on a price, but aims to complete the transaction by October or November. It may issue shares to the parent, which owns 75% of the company, and also tap the public equity and debt markets.

Analysts estimate the value of the seven companies could range between $30 billion and $40 billion. If it issues the equivalent of 75% of $30 billion in new shares to its parent, or $22.5 billion, it will still have to raise $7.5 billion from the capital markets û probably half debt, half equity.

China Telecom says it may structure the transaction along similar lines to its acquisition of three mobile phone companies from its parent in 1998. It paid $6.4 billion for the companies, after raising $2 billion in equity and $600 million in five-year bonds. The paid amount equated to about $1,900 per subscriber, according to Ni Quiaque Lai, an analyst at Credit Suisse First Boston. The current transaction should be worth about $2,300 to $2,500 per subscriber, he says.

China Telecom had 20.05 million subscribers across its six subsidiaries at the end of May this year. At the end of 1999, the seven companies it plans to acquire had 10.6 million subscribers, but that figure has risen to at least 12 million since then, the company says.

China Telecom had net cash in hand of Rmb14.09 billion ($1.8 billion), but has earmarked most of that for capital expenditure. Some of the debt portion of the financing may be denominated in renminbi because the interest rate is lower than on foreign debt. "It's the sort of thing our investors would like to see because it reduces our capital costs," the company says.

Preparing for WTO

China Telecom's move comes as the country prepares to open itself to competition from foreign operators when it joins the World Trade Organization. The erstwhile monopoly wants to strengthen itself so it can make more acquisitions and eventually attract foreign partners.

"In future it will be invevitable for us to have strategic alliance with other telcos," the company says. "We very much welcome the idea because we can share technical know-how and will have more funds. Right now, though, management is focused on acquiring more mobile operators. We need to have a stronger company to attract the best partners."

Even as it looks to partner foreign rivals, China Telecom will face intensified competition both from international and domestic operators. Earlier this month, China Unicom, the country's second-biggest operator, raised $4.9 billion in its initial share offering, giving it a healthy infusion of funds which it can use to narrow the gap with the former monopoly.

Under its agreement with the European Union, foreign operators will be able to acquire 25% of domestic companies one year after China's entry into the WTO. That rises to 35% after two years and to a maximum of 49% after three years. Since foreign operators will not be allowed to hold a licence alone, forcing them into partnerships and joint ventures with local operators. And whoever gets the best partners stands the best chance of succeeding long term.

Once it has acquired the seven operators it now has in its sights, China Telecom still has another 13 that it could potentially buy from China Mobile. "The ideal thing would be to acquire all of them at one go, but some of the networks, especially in the west, aren't in as good a condition as we would like," the company says. "If we acquire them now investors wouldn't like it because we'd have to spend too much money on upgrading them. So we might as well acquire the best ones first, then acquire more later if we want to."