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China Unicom Seals Takeover Deal

Zacks Equity Research

Following the fulfillment of conditions and receipt of majority votes, China Unicom (Hong Kong) Limited (CHU) confirmed the acquisition of 100% stake in Unicom New Horizon Telecommunications Company Limited from the parent company China United Network Communications Group Company Limited, aka, Unicom Group. The acquisition was announced in late November.

The acquired assets include fixed-line telecommunications network across 21 southern China states and cities. These properties are currently under lease with Unicom Group. The lease will expire on December 31, 2012.

With this transaction, China Unicom gained control over all the domestic fixed-line telecommunications businesses and assets of the state-controlled Unicom Group. This will result in improved organizational planning and efficiency for China Unicom, giving it a competitive edge over its peers.

Based in Beijing, China Unicom is the second largest wireless operator in the country, with 8.06% stake being controlled by Spanish Telecom giant Telefonica (TEF). China Unicom operates through two business segments: mobile (56% of 2011 service revenues) and fixed-line (44% of 2011 service revenues).

We believe that China Unicom will be able to boost its earnings and unlock greater long-term value for its stockholders with this deal. The company is also expected to benefit from the ongoing development strategy that is aimed at enhancing its growth and profitability. China Unicom expects to generate higher revenues by accelerating large-scale developments of 3G and fixed-line broadband services.

Nevertheless, the company incurs high levels of marketing and promotional expenditures that will likely hamper profitability in the future. Further, we remain concerned about the precipitous decline in the landline business as well as intense competition in the domestic wireless market.

We maintain our long-term Neutral recommendation on the stock. China Unicom currently holds a Zacks #3 Rank, reflecting a Hold rating for a period of 1-3 months.

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