China Telecom is to spend as much as CNY59 billion (US$8.7 billion) over the next three years in leasing use of its parent company’s newly-acquired CDMA network. In a statement this morning, China Telecom said it would lease the network from its state-owned parent (China Telecommunications Corp) at a fee equal to 28 percent of network revenues up until 2010. The operator said that the maximum lease fee in 2008 would be CNY4 billion, rising to CNY20 billion in 2009 and CNY35 billion in 2010. The companies also confirmed the previously reported financial terms of their acquisition of the network from rival China Unicom. Under the agreement, China Telecommunications Corp will acquire the network for CNY66.2 billion while China Telecom will buy the network’s operations, business and subscribers for CNY43.8 billion, resulting in a total price tag of CNY110 billion (US$16.2 billion). In a separate announcement, China Unicom said it expects to book a pre-tax gain of CNY37.56 billion (US$5.5 billion) from the sale, and will use the proceeds to expand its own GSM network and pay-off debt.
According to analysts spoken to by Reuters, China Telecom’s decision to lease space on the network rather than acquire it directly is linked to the negative impact the currently underperforming network could have on the operator’s earnings. “Only after the network starts showing clear outperformance will the company think about acquiring it,” said Daiwa Institute analyst Marvin Lo. He added that improvements should occur as the network is upgraded to 3G technology. It was reported earlier this month that China Telecom had issued tenders worth up to HK$34.3 billion (US$4.4 billion) for expansion of the CDMA network into new coverage areas. It plans to increase the number of users on the network to 100 million by 2010 from about 40 million now.