China: Is the Unicom-Telecom merger on the rocks?

Rumors about a possible merger between China Unicom and China Telecom – the second and third largest Chinese wireless operators – apparently resurfaced late last week.

The benefits of a merger appear significant on the surface for both companies, given their high fixed costs and weaker economies of scale compared to larger rival China Mobile. Unicom and Telecom have about 288 million and 194 million wireless subscribers, respectively, compared to China Mobile’s 823 million subscribers.

Telecom and Unicom had EBITDA margins of roughly 30% in 2014, per our estimates, compared to over 40% for China Mobile. Revenue synergies could also be meaningful, owing to network integration, the wider marketing and distribution reach and potential for cross-selling wireline and broadband services – as Unicom’s wireline operations are stronger in northern China, while Telecom is stronger in the south.

However, despite the potential benefits to shareholders, there’s a very low probability that a merger will materialize, since the carriers are state-backed, and the move could conflict with the government’s current agenda.

Full content: Forbes

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