Restless giant

Despite seeing the collapse of its US$5.3 billion acquisition of Millicom International Cellular, China Mobile chairman Wang Jianzhou has said the company remains committed to expanding overseas.

The 11th-hour failure of the company to secure the largest overseas acquisition by a domestic player did little to inspire confidence in China’s ambition to turn its largest firms into multinationals.

With China Mobile poised to add Millicom’s 10 million Asian, African and Latin American subscribers to its existing 278 million, the Luxembourg-based firm, 40%-owned by Sweden’s Investment AB Kinnevik, ended talks in July. It said that China Mobile couldn’t put together an acceptable offer within a reasonable timeframe.

Following last year’s failed bid for Pakistan Telecommunications (PCTL) – small Hong Kong wireless operator Resources Peoples is China Mobile’s only successful acquisition – fingers were pointed at cumbersome bureaucracy and an inability to close a deal that wouldn’t be found in a private operator.

Playing it safe

"These Chinese companies are state-owned enterprises, so there is a lot to consider," said Andy Xie, Morgan Stanley’s chief economist for Asia. "The people involved must make sure they don’t overpay as they might be suspected of taking bribes. This has been a problem in the past."

As a result, officials spent considerable time carrying out the due diligence, a process that was hindered by China not having diplomatic ties with five countries in which Millicom operates – El Salvador, Guatemala, Honduras, Paraguay and Chad.

While analyzing the assets at stake, some experts believe China Mobile came to the conclusion they themselves reached: Millicom isn’t worth US$5.3 billion. It may offer access to emerging markets with potentially strong growth prospects, but the assets are scattered across 16 countries.

"It looks like a nightmare, full of hodgepodge assets," was CLSA analyst Francis Cheung’s assessment.

Jacky Yang, a senior analyst at Norson Telecom Consulting, agreed, saying that despite its naivety in this area, China Mobile "wants to pay the right price for the right company, without reasonless gambling".

At least part of the blame for the inflated asking price can be laid at the door of Middle Eastern telecom groups on spending sprees of their own. Emirates Telecommunications outbid China Mobile for PCTL US$2.6 billion to US$1.1 billion, while Dubai-based mobile operator Investcom was leading the race for Millicom until it was distracted by a US$5.5 billion takeover of South Africa’s MTN.

This is symptomatic of an industry in which there is very little available for purchase, a fact that doesn’t bode well for China Mobile’s efforts to live up to the government’s "go global" initiative.

"China Mobile is coming to the table a bit late," said Cheung. "There are not that many deals out there as most of the good stuff has been bought up. People have already started looking at Pakistan and Bangladesh. Even Vietnam is getting crowded."

Apart from venturing into the unknowns of Russia, he believes China Mobile’s only viable current option might be to return to the negotiating table with Millicom.

Domestic strength

In the light of this depressing outlook, investors in the company’s thriving stock are entitled to ask whether there is any point in making overseas acquisitions when business is booming back home.

In recent years China Mobile has seen unchallenged subscriber growth at the expense of fixed line operators and controls 44% of the country’s telecom revenues. It is looking to capitalize on its dominance by targeting rural areas, where mobile phone penetration is just 11%; these areas were responsible for more than half of all new subscribers in the last year.

The only real threat to China Mobile is the regulator deciding the company is too successful and moving to rebalance the market. A recent Citigroup report suggested that such steps may be taken in tandem with the long anticipated awarding of 3G licenses.

"An overseas acquisition could divert too much of the management’s time," said Cheung. "Everybody wants them to pay more attention to the profitable core business, not managing the international business."

Nevertheless, Yang doesn’t expect disappointment over Millicom or the inherent risks of making foreign acquisitions to stand in the way of China Mobile’s overseas ambitions. "The company’s plans for international expansion will not be halted."