Merger talks of China Telecom + China Unicom

Top Chinese government officials are reviewing a proposal to merge China Telecom and China Unicom, the nation's number 2 and 3 mobile operators, according to reports published by Bloomberg and others on Tuesday.

So far, there has not been official confirmation of the story although share prices of both companies have risen on the Hong Kong exchange.

Combined, the two carriers have 590 million mobile subscribers, compared to 905 million for China Mobile. A merger would enable a faster rollout of 5G but reduce the competitive landscape for mobile services to two players. Both carriers have reduced CAPEX in the first half of 2018 following completion of most 4G upgrades. Both reported surging mobile data traffic and an impact from increased competition and the elimination of provincial roaming charges.

Exactly one year ago, the Chinese government arranged for top Chinese tech companies, including Alibaba and Tencent, to inject RMB 78 billion (US$11.7 billion) into China Unicom in an effort to accelerate the transformation of its network. The consolidation could play to the favor of these investors.

As state-owned enterprises, both China Telecom (estimate 287,000 employees) and China Unicom (estimated 252,000 employees) have large numbers of workers and retirees.  While network integration and automation may reduce the need for so many employees from a technical perspective, from a social point of view, large-scale reductions may not be possible.

The big synergy in the merger presumably would be to reduce the rollout cost of a nationwide 5G network, which both China Telecom and China Unicom were anticipating in 2020. Both carriers have 5G pilots underway and limited trial services are expected in 2019. Full-scale nationwide rollout for each would involve upgrades to millions of base stations, and improvements to front-haul and backhaul infrastructure. China Unicom recently disclosed that it now has 910,000 4G base stations in operation. China Telecom has stated that it had 1.2 million 4G base stations in operation.

 Many 5G small cells and in-building networks are also required for the 5G upgrade plan. A merged entity presumably could build this at a much lower cost -- perhaps even approaching 50-60-% of what otherwise would be spent. For network equipment, especially Huawei and ZTE, this could be bad news. For China Tower, which recently completed an IPO, this could mean only 2 potential clients on its telecom masts (China Mobile and this merged entity).

With only two mobile operators, perhaps the really intense mobile price competition in China would ease. China Mobile must make do with ARPU of RMB 58.10 (US$8.43) -- about 1/6th the billing per subscriber per month as U.S. operators. China Telecom and China Unicom's mobile ARPU is lower, at RMB 47.9. This leaves very little profit potential per subscriber, making the business case for a deep, nationwide 5G rollout more difficult for two carriers than for one..