China Unicom is working to oust foreign investors from its telecommunications projects this fall, and it appears investors may not leave quietly.
The Chinese government has ordered China Unicom, the country’s second telecommunications operator, to wind up all China-China-Foreign (CCF) partnerships by the end of the year as it prepares for an initial public offering.
Unicom began setting up CCF agreements with companies like Sprint Corp., Deutsche Telekom and Bell Canada International in 1994 as a way to access much-needed capital to construct Global System for Mobile communications networks and other telecommunications projects and get around the government’s ban on direct foreign investment in telecommunications. It has signed more than 40 CCF joint ventures with life spans ranging from 15 to 20 years.
Using the CCF model, Unicom built out GSM networks in 88 major cities across China with a total capacity of about 2 million lines and made itself a competitor to dominant state-owned provider China Telecom, said Hui Pan, chief economist with IGI Consulting in Boston.
While foreign companies were allowed only to invest in a network’s construction and not operate the system, the Chinese government remained concerned foreign investors still had some control in the joint ventures. It declared CCF schemes improper last year.
Now Unicom is telling foreign investors to get out and has begun negotiations about how much it will compensate the investors, who are unhappy about their premature exit from a telecommunications market that promised high returns on their large investments.
“You won’t find very many happy investors,” said Pan. “They are going through turmoil and uncertainty. They have to negotiate a way out of these deals.”
Many foreign investors are angered over terms Unicom has offered, which appear to be nothing more than the original amount of money the investors sunk into the joint ventures. Some investors are threatening to sue and file complaints with securities regulators in their countries, believing they are entitled to packages that take into account losses in potential revenue and costs of supporting the networks. Legal action could postpone plans Unicom has in taking the company public later this year. In October, Unicom wants to go to the Hong Kong and New York stock exchanges to raise the $1 billion to $3 billion its needs to mount a credible challenge to China Telecom.
“Investors have complained about this,” said a U.S. Commerce Department official. “But they haven’t come up with any suggestions as to what the U.S. government is to do about it. We have expressed our concern numerous times with the Chinese government.”
Companies RCR contacted said they were either in preliminary negotiations with Unicom or had not yet received notification from the carrier.
Metromedia International Group Inc. recently revealed that Unicom had contacted the company about terminating two of its four joint ventures, and negotiations are under way between the two companies. Unicom has told Metromedia that due to unspecified technical reasons, the cash distribution plan for the first half of the year had not been decided. As a result, Metromedia can’t determine how much compensation Unicom will give the two mobile-phone joint ventures.
“Depending on the amount of compensation, the company will record a non-cash charge that will reduce the carrying value of the goodwill associated with its telecommunications joint ventures in China,” the company said in a recent U.S. Securities and Exchange Commission filing. “The goodwill balance at June 30, 1999, was approximately $67 million.”
Metromedia said it could not comment on the situation because it remains in a quiet period.
Sprint Corp., which established a landline joint venture in 1995, said it met with Unicom in late July.
“We want something fair and equitable,” said James Fisher, Sprint spokesman. “It’s important they realize the full extent of our investment and that we receive appropriate terms coming out of this deal.”
Sprint’s joint venture never turned a profit because the project was delayed until 1998 because of interconnection problems. The company hasn’t made public how much it has invested in the CCF joint venture.
BCI said it too is in preliminary talks with China Unicom over its two mobile-phone joint ventures. Bell Canada said its relationship with Unicom has been disappointing and could not comment on whether the joint ventures turned a profit.
“It’s been a rather disappointing relationship that hasn’t met all our expectations,” said Peter Burn, spokesman for BCI. “We’ve had some disagreements with China Unicom.”
Amtec Inc., a New York-based telecommunications services company set up to invest in China, said Unicom has not contacted the company. Amtec’s investments include construction of 10 GSM networks in the Hebei province.
Ultimately, the treatment foreign investors receive in their negotiations could set the tone for future investment in the country after China gains World Trade Organization entry. After WTO entry, China will be required to open its telecommunications markets to foreign investors.
“Fair and equitable treatment of existing investors will be a strong signal concerning the value of WTO concessions,” said Burn. “Certainly the treatment of current investors will be practical evidence as to how future investors are treated.”
The Chinese government has yet to resume negotiations with the United States over WTO entry. Premier Zhu Rongji’s April visit to Washington resulted in China agreeing to allow 49-percent foreign ownership in all telecommunications services, but China backpedaled later.
Reports also indicate China Unicom is having difficulty finding funds to pay off the investors. The carrier’s best hope may be to convince the CCF partners to restructure their partnerships as leases such as the one Siemens AG has structured. Its venture with the China International Trust and Investment Corp. (CITIC), called Xinde Telecom International, is structured as a leasing business whereby the foreign partner is not technically co-owner of the network. Xinde provided $180 million to Unicom to lease equipment from Siemens, and repayment is tied to a periodic assessment of the financial performance of the project.
The Xinde-way may prove to be a viable alternative for other foreign companies. Analysts, however, note little difference exists between Siemens’ leasing structure and CCF schemes.
Global Wireless Beijing correspondent Michel Lens contributed to this article.
