Morning Report: A Small Note On The Weird China Unicom Deal

Morning Report: What happens when the biggest Chinese Internet companies have to invest in a big, hulking state-owned telecom?

It’s no secret that Chinese Internet giants are performing strongly in the current cycle. Both Tencent and Alibaba, for example, reported strong earnings this week. Tencent shares broke higher after the firm reported 59 percent revenue growth; meanwhile Alibaba itself grew 56 percent, ahead of expectations.

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That operational success has led the firms to be active investors. Alibaba, according to Crunchbase, has made 9 investments so far in 2017. Tencent has made 34. Notably, the firms are so active they can wind up on opposite sides of explosive markets. Alibaba is behind Ofo, one of the massively over-funded bikesharing companies. Tencent backs Mobike, another stuffed-full competitor.

But both firms are on the same side of a recent deal that is raising eyebrows both here and in China: an $11.7 billion investment into China Unicom, a state-owned telecom enterprise with tens of billions of revenue.

Tencent and Alibaba are the not the only players in the deal, however. The list of tech companies in the transaction — first flagged to me by our own Jason Rowley — has all the players you could expect:

You can now see why the deal caught our eye. A nearly $12 billion transaction, pushing money from private companies into a state business? Albeit one that partially trades, but that’s only so important.

As it turns out, politics lurks behind the transaction. Here’s Reuters on the deal:

The China Unicom fundraising is part of Beijing’s push for state-owned enterprises to be revitalized with private capital. China Unicom is among the first batch of state-owned enterprises slated for “mixed-ownership reforms.”

But the transaction comes at a cost, as Bloomberg’s Gadfly explains. The firms are investing in a higher-cost share class than they otherwise might have in a different market:

Why don’t the newcomers, including Tencent Holdings Ltd., Baidu Inc., Alibaba Group Holding Ltd. and JD.com Inc., invest directly in the so-called H shares?

Unicom Group, the state-owned parent of the listed units, is smart — it’s raising money selling higher-priced assets to buy cheaper stock in Hong Kong. On March 31, the last day the A shares traded, they were valued at a whopping 115 percent premium over their H siblings, Bernstein Research estimates. While the H shares have been bid up since the Shanghai halt, the mainland stock was still 78 percent more expensive.

Womp. So the firms are buying into a firm that, we can presume, isn’t as innovative and capital efficient at a premium? Woof. It isn’t clear if the transaction, which does feature other local investing entities, will impact the disbursement cadence of Alibaba, Tencent, and their ilk. But I suppose if they had so much money to pour into bikesharing, there is likely enough lucre left to go around.

From the Crunchbase Daily:

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