China Mobile invests in PakTel

Kevin Lee/Ovum
23 Jan 2007
00:00

After several false starts, China Mobile has finally ventured overseas by buying 88.8% of small Pakistan mobile operator Paktel from Millicom.

Ovum senior analyst Kevin Lee comments:

'It has been able to conclude the deal despite its failed purchase of Millicom Group in June 2006. This is the first strategic overseas acquisition for the world's biggest mobile operator by subscriber, and the first successful implementation of the overseas strategy Chinese operators have been pursuing to sustain continuous organic growth. The acquisition also demonstrates China Mobile's strong determination in the emerging markets.

Coincidentally, this acquisition falls in Pakistan where the company failed its previous attempt in buying the mobile arm of Pakistan Telecom in 2005. The world's 6th most populated country provides a comparable environment in terms of demographic and economic for China Mobile to grow its overseas experience. With over 165 million residents, Pakistan is a growing economy benefited by a wide-ranging economic reforms: published figures recorded a strong GDP growth of 7% in the financial year 2005-06. The large rural population of about 66% would also be an opportunity for China Mobile to duplicate its success in developing the rural market in China to Pakistan. We believe the investment in Pakistan is a favourable one given the close diplomatic relationship as well as strong economic and trading cooperation between the China and Pakistan.

The Paktel deal costs $284 million including the repayment of intercompany debt: it is a much small transaction for China Mobile compared to the previous $5.3 billion attempt at Millicom. We believe the deal is worthwhile: despite its modest value, it allows China Mobile to expand into overseas business to drive business growth, and at the same time it provides sufficient reserves for the operator to focus on the domestic 3G development which is yet to see license award. The strategic value of acquisition lies in synergy advantages in handset procurement, network deployment and operation management and distribution. This will also provide a learning experience to export its rich network knowhow and data service experience to a new market.

Nevertheless, the acquisition will be a challenge for China Mobile given its lack of international management experience. Paktel is the fifth-largest GSM operator by subscribers in Pakistan with around 1.5 million subscribers by September 2006. Despite a 62% year on year growth in 2006, the venture with only 4% market share is under intense competitions from Orascom Pakistan (Mobilink) and Pakistan Telecom (Ufone) which takes a respective 51% and 24% share. China Mobile will face challenges including building local market knowledge, product development catering to local cultures, local customization, and integrating the company culture into the non-Chinese market.

Having made the first foray, we expect that China Mobile will continue to look for other overseas opportunities to achieve scale in the world mobile stage and to fuel continuous growth of the group. The pace will accelerate once the company builds a successful blueprint in running an overseas subsidiary.'

Kevin Lee is based in Hong Kong

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