China Unicom to repurchase $1.3 billion of stock from SK Telecom

China Unicom is to buy back HK$10 billion ($1.3 billion) worth of its own shares from Korea's SK Telecom, according to an announcement this week. The deal comes weeks after the Chinese telecom operator arranged a share swap of a similar size with Spain's Telefonica SA.

A total of 899 million shares are to be repurchased -- equal to 3.79% of the company and SK Telecom's entire stake. Under an agreement between the two companies, Unicom will pay HK$11.105 per share, which represents a 1.3% discount to the last trading price before the deal was announced, HK$11.26.

The completion of the deal is conditional on the approval of at least 75% of Unicom's shareholders. An extraordinary general meeting is expected to be held early in November for them to vote on the proposal. 

The deal did not excite Unicom's other shareholders: on Monday the company's share price dipped by 4.97%, compared with a 2.07% decline on the Hang Seng Index. Some of these losses were recovered yesterday when the stock gained 2.8%.

In January, Unicom was granted a license to operate next-generation phones. As such, the company is facing serious capital expenditure as it makes the necessary upgrades to its network, leading analysts to question whether spending $1.3 billion on a share purchase was the right thing to do.

Unicom's net cash balance at the end of June was Rmb7.9 billion ($1.16 billion), suggesting that the company will have to use debt to fund the transaction. A report by Guotai Junan released yesterday, assumed that the amount borrowed could be Rmb10 billion at an interest rate of between 3% and 5%. This would mean that the financing would cost between Rmb300 million and Rmb500 million, which the Chinese bank estimates will account for between 2.4% and 4% of 2010 projected earnings.

Earlier this month, Unicom entered into a $1 billion share swap with Telefonica -- a deal that will result in the Spanish company taking an additional 3% stake in Unicom in exchange for giving Unicom 1% of its own stock. This increases Telefonica's stake to 8%. A Citi research report, also out yesterday, said that it would have been better for Unicom to persuade Telefonica to buy SK Telecom's stake, which would have resulted in leftover cash for capital expenditure.

Meanwhile, investors reacted positively to SK Telecom's divestment -- with its share price up 2.9% on Monday and a further 2% yesterday. The deal marks the end of a relationship that started in 2006, when the Korean company bought $1 billion worth of convertible bonds (CB) issued by China Unicom. The CBs were all converted by the summer of 2007, leaving SK Telecom with a 6.6% stake and making it the second largest shareholder in the Chinese company. This holding was subsequently diluted to 3.8% after China Unicom merged with China Netcom last year.

Moody's Investors Service estimated yesterday that the asset sale will reduce SK Telecom's leverage to below 1.8 times for 2009. More specifically, the money raised from the sale will be used to pay off debt taken out in connection with its acquisition of SK Networks, a leased-line business that SK Telecom bought in May for $714 million.

Separately, China Unicom will launch Apple's iPhone in China after the national holiday next week. The phone will be priced at between Rmb5,000 and Rmb6,000, depending on the service plan chosen. The iPhone has been available in China unofficially ever since it was released over two years ago. Although an official release has been long anticipated, the high cost of the handset is expected to stop it from becoming a mass-market product and the relatively low sales volumes will therefore have a negligible effect on Unicom's performance.