China’s biggest-ever telecom merger may leave investors on hold

technological, geopolitical and social objectives are the driving force behind what could be China’s biggest-ever telecom merger. Shareholders celebrating the deal might do well to remember that.

Shares of China Unicom (Hong Kong) Ltd and China Telecom Corp surged on Tuesday after Bloomberg News reported that top leaders were reviewing a proposal to merge their state-controlled parents. The Hong Kongtraded units have a combined market value of HK$600 billion (RM314.64 billion).

Beijing’s motivation is to seek an edge over the United States in 5G. The next-generation wireless technology may be 100 times faster than 4G, enabling a revolution in connectivity of everyday objects from refrigerators to traffic lights. It will also pave the way for driverless cars and, some fear, make spying a lot easier.

Whoever leads the world in 5G may lay the soil for development of the next Apple Inc or Amazon.com Inc. “5G is the glue that makes smart cities work,” said Bernstein Research analyst Chris Lane.

Those grand ambitions sound exciting, but what do they mean for investors in the companies that will build these networks?

China’s Ministry of Industry and Information Technology said in May last year 5G would involve investments of US$411 billion (RM1.7 trillion) by the country’s telecom operators between 2020 and 2030. The figure sent “shockwaves” through the sector, according to HSBC Holdings Plc.

Merging the parents of Unicom and China Telecom will reduce the burden by enabling them to share investment in a single network, but the ministry’s figure is still more than five times their combined market value. China Mobile Ltd, by far the biggest of the trio of operators, has a market capitalisation of about US$195 billion.

China often treats its stateowned companies as tools of government policy — shuffling assets, merging and splitting corporations to suit strategic aims even after they have been listed. Such manoeuvres haven’t always worked out well for investors.

To be sure, China’s also giving its telecom operators a leg up: it is allocating spectrum to the trio later this month at no cost to the companies beyond a small annual fee, enabling them to preserve cash for network spending. US carriers, on the other hand, will have to fork out billions of dollars in auctions.

Perhaps China’s 5G rollout will unleash a boom that, besides benefiting consumers and creating opportunities for gear-makers and entrepreneurs, will also drive profits for the service providers. Investors in Chinese telecom companies need to know they’re not the first thought on the government’s mind.