China's largest fixed-line phone company, China Telecom Corporation Ltd, announced Tuesday its plan to purchase new provincial phone networks from its parent company. This follows a similar purchase in October last year.

China Telecom Ltd is to acquire 10 provincial networks from its parent company for 27.8 billion yuan (US$3.34 billion), it said on its website Tuesday.

The 10 networks are in the provinces of Hubei, Hunan, Hainan, Guizhou, Yunnan, Shaanxi, Gansu, Qinghai, Ningxia Hui Autonomous Region and Xinjiang Uygur Autonomous Region.

The net indebtedness of the targeted 10 provincial networks on December 31 last year amounted to approximately 40 billion yuan (US$4.8 billion).

The purchase price will consist of payment of an initial cash consideration and a deferred consideration.

The initial cash consideration of 8.34 billion yuan (US$1 billion) will be made on completion of the acquisition by payment in RMB or any foreign currencies in an equivalent amount.

While the deferred consideration is payable 10 years after completion and China Telecom is entitled to prepay all or part of the deferred amount at any time in the 10-year period.

The 10 targeted provincial networks have a total of 42.9 million subscribers, commanding 95.9 percent of the market share in the 10 provinces.

Business in the 10 provinces includes fixed-line telephone, Internet and managed data, and leased line services.

Last year, fixed-line subscription and broadband use in the 10 provinces grew 18.3 percent and 198.2 percent compared to the previous year.

With the acquisition, the geographic coverage of the company's operations will expand to 20 provinces and its subscribers will exceed 160 million.

"It will be conducive to enhancing our market position and competitiveness," said Zhou Deqiang, chairman and chief executive officer of China Telecom Ltd.

"With the comparatively low telecom penetration rate of local telephone service, the purchase represents a new and important opportunity," he added.

China International Capital Corporation (HK) Ltd, Morgan Stanley Dean Witter Asia Ltd and UBS AG are the financial advisors to the company.

"The purchase of new networks will help China Telecom Ltd to further widen its business range as well as grab more market share from fierce domestic competition," said Dai Chunrong, an analyst from China Securities.

She believes the recovery of the world telecom market and sustained domestic telecom development this year will help boost investors' confidence in the company's performance this year.

Such acquisitions have become common practice for China's three largest telecommunications companies China Telecom, China Mobile and China Unicom, which have each made initial public offerings of their parents' most profitable provincial networks.

Each company has also purchased less profitable networks from parent companies.

China Telecom Ltd late last month posted a better-than-expected 2003 net profit of 24.69 billion yuan (US$2.98 billion), up 153 percent from the previous year, benefiting from its solid growth in wireless and broadband businesses.

Turnover for 2003 edged up to 118.5 billion yuan (US$14.2 billion), representing growth of 8.1 percent from the previous year, and the company declared a dividend of 0.0689 yuan per share.

China Telecom Corp Ltd said last month it plans to issue shares worth roughly HK$23.7 billion (US$3 billion) to fund the acquisition of the 10 provincial phone networks.

The company said that of the 8.317 billion shares it hopes to issue, about 9 percent are owned by its parent firm, which would effectively lower the government's stake in the company.

In October last year, China Telecom acquired six provincial networks from its parent for 46 billion yuan (US$5.56 billion), bringing its number of city and provincial networks to 10.

"We are dedicated to putting more of the parent assets into our listing arm since we kicked off our IPO two years ago," said an official with the general office of the board of China Telecommunications Corporation, parent of China Telecom Ltd.

"We think we would like to list all our assets on the stock market at the right time," he said.

(China Daily April 14, 2004)