Chinese telco China Netcom is selling its fixed-line business in Shanghai and Guangdong, to its parent company.
According to a statement Monday, China Netcom's parent company China Network Communications Group will pay RMB 3.5 billion (US$450 million) for the former's fixed-line business in the two Chinese cities.
China Network Communications Group will pay an initial amount of RMB 1.05 billion (US$135 million) in cash on the first business day following the completion of the deal, and will pay the remaining amount in cash within 30 days.
The deal is expected to be closed by the end of February 2007, subject to approval by independent shareholders and Chinese government authorities.
China Netcom CEO Zuo Xunsheng said the decision to sell off the company's fixed-line business hinged on several factors, including the quality of the assets being sold, the growth prospects of these assets, earnings potential and competitive advantages in their respective markets, as well as other financial and operational indicators.
Zuo added that China Netcom's management team believes the terms of the agreement are fair and reasonable, and are made in the interests of the company and its shareholders.
Company chairman Zhang Chunjiang, said: "China Netcom has extensive network resources and higher profitability in the northern service region. After the sale of the Guangdong and Shanghai assets, we will be well-positioned to concentrate our resources in the northern service region." He added that the company will maintain its fixed-line business in this part of the country.
Zhang noted that China Netcom believes the deal will allow the operator to take better advantage of growth opportunities and "reinforce our competitiveness in terms of operations and services in our northern service region".
"We are confident that this will result in better financial results in the future," he said.
In a research note by Credit Suisse Group released earlier this month, analysts Jeffrey Tan and Terry Chan pointed out that there are 47 million fixed-line subscribers in Shanghai and Guangdong.
With a 95 percent market share, China Telecom dominates the fixed-line markets of these two Chinese cities, according to the analysts.
Victor Liu, an analyst with market research company In-Stat, told ZDNet Asia that the decision by China Netcom to sell off its fixed-line assets may be seen as a move by the operator to consolidate its business and make preparations to support upcoming 3G services.
The Chinese government has said it would issue 3G licenses before the Beijing Olympics in 2008.
Liu said China Netcom currently may be the weakest, financially, among the telcos competing for 3G licenses in the country. "As the issuance of 3G licenses in approaching, China Netcom wants to show better financial results…and gather more funds from capital markets to build a 3G network," he said.
According to estimates by Analysys, a 3G network that supports 10 million subscribers could cost up to RMB 20 billion (US$2.5 billion) in China. The analyst company noted that China Netcom had only RMB4.9 billion (US$612 million) cash-in-hand at the end of 2005.
In-Stat's Liu said recent moves by China Netcom to consolidate its business, such as the US$402 million sale of Asia Netcom last year, indicates the telco is trying to get rid of loss-making or less profitable units to fend off competition from bigger rivals.
China Netcom sold off Asia Netcom in August 2006, its unprofitable submarine cable unit to an investor group led by Ashmore Investment Management Limited, Spinnaker Capital Limited and Clearwater Capital Partners.