Vodafone in £1.7bn move into China's mobile phone market

Vodafone yesterday staked a claim in China, the world's largest mobile telephone market, by agreeing to pay £1.7bn for a 2 per cent interest in the government-controlled China Mobile Hong Kong (CMHK).

Vodafone yesterday staked a claim in China, the world's largest mobile telephone market, by agreeing to pay £1.7bn for a 2 per cent interest in the government-controlled China Mobile Hong Kong (CMHK).

The investment is part of a wider strategic alliance, which establishes co-operation between the two companies in mobile services, technology, operations and management. Vodafone and CHMK are also looking at further expansion in Asia and the development of third generation services in China.

Chris Gent, Vodafone's chief executive, said he was prepared to increase his stake in CMHK. "The company hopes to buy (more) shares in China Mobile. We will help them improve their services and products, and they will help us enter the Chinese market."

Wang Xiao Chu, chairman of CMHK, said: "Vodafone was chosen as a strategic investor because of our common focus in the telecom business. It is not because of fund-raising needs. Without Vodafone our fund-raising activities will still be successful."

Mr Wang, however, was non-committal about Vodafone being the Chinese company's sole strategic partner. He told a press conference in Hong Kong that a further placing of stock could allow Vodafone to raise its interest, or result in the addition of new investors, subject to the approval of the Chinese government which currently holds 75 per cent of CMHK. The remaining 25 per cent is floated on the Hong Kong Stock Exchange.

CMHK is to use the money to help fund the $32.8bn acquisition of seven networks on the Chinese mainland, including operations in Beijing and Shanghai, from its state-owned parent, China Mobile Communications Corp. The deal will give CMHK 39 million users - about 80 per cent of the Chinese mobile market.

CMHK will issue nearly $23bn in new shares to its parent and pay almost $10bn in cash for the networks, while assuming $1.2bn in debt. The cash will be raised from a $6.6bn stock sale, including a public offering to raise $4.1bn plus the $2.5bn stake sale to Vodafone.

Analysts were divided over the deal's merits, while investors pushed Vodafone stock down 1.75p to 249.75p. It peaked at 400p in February.

Jim Ross, analyst with ABN Amro, said: "I think strategically it makes a lot of sense. The Chinese market is a huge market and an undeveloped one. Any operator that wants to be global, as Vodafone does, needs to be there.

The price paid by Vodafone for its stake values each CMHK subscriber at $5,000. That compares with the $4,000 per subscriber France Telecom paid for Orange earlier this year, but is well below the $12,000 per subscriber that Deutsche Telekom has offered for VoiceStream.

Others questioned just what Vodafone is getting for its investment. "The Chinese are famous for taking foreigner's money but not their instructions," noted one analyst. "Although Vodafone says China wants input, I wonder if they really do."

Analysts also said the stake will need to be substantially expanded to build a meaningful presence in China, implying further debt. Vodafone's borrowings are estimated at around £16bn, although it is expected that disposals, which include the anticipated sale of Infostrada for some £7bn, will cut total debt to £8bn by March.