China’s internet giants may find a calling in Unicom

If there’s a lesson that China’s private firms should take away from the crackdown on Dalian Wanda Group Co. and its freewheeling cohorts, it’s that there’s no better time to get into bed with state-owned
enterprises.
That’s even the case if the partner up for grabs is China Unicom Hong Kong Ltd., the weakest of the
country’s big three telecom operators.
Baidu Inc. and JD.com Inc. are among a handful of firms, along with Tencent Holdings Ltd., considering investing as much as $12 billion in China United Network Communications Ltd., the Shanghai-listed arm of China Unicom, Reuters reported recently. China United Network Communications hasn’t signed a pact with any potential investors yet, it said in a statement to the Shanghai Stock Exchange on Sunday, but it is one of six state-run enterprises slated for mixed-ownership reform.
Outside of being internet companies, these potential Unicom investors have one thing in common: They’re all non-state owned, and they increasingly dominate China’s shifting economic landscape.
At this point, it’s worth remembering that private conglomerates such as Wanda, HNA Group Co., Anbang Insurance Group Co. and Fosun International Ltd. were also, until recently, viewed as largely untouchable because of their apparent political connections. Now, having made risky overseas bets, they’re in Beijing’s bad books and have lost their easy access to bank financing.
While China’s internet firms haven’t indulged in the same degree of debt-fueled spending — the $40 billion that HNA used for domestic and overseas asset purchases since the start of 2016 is roughly what’s been spent by Baidu, Tencent and Alibaba Group Holding Ltd. over that period combined — no privately held organization in China is too big to fail. It wasn’t so long ago that Wanda Chairman Wang Jianlin was China’s richest man, after all.
The benefits of investing in China Unicom include strengthening ties with a company responsible for rolling out the next-generation technology essential to keeping consumers hooked into internet companies’ online sites. Yet it will be quite hard to sell to shareholders, and not just because Unicom has posted two years of declining earnings.
State reform in China tends to progress at a glacial pace. Take Sinopec Marketing Co., the gas station-to-convenience store arm of China Petroleum & Chemical Corp., or Sinopec. In late 2014, Sinopec offloaded a $17.5 billion interest in the unit to a group of investors, Fosun and Tencent among them. A promised IPO has faced numerous delays, leaving parties with little hope of an exit any time soon.
Even so, against the backdrop of President Xi Jinping’s deleveraging campaign, it’s hard to underestimate the advantages that ties with China’s SOEs may bring. A public-sector entity in your corner could turn out to be the internet companies’ ultimate asset.
— Bloomberg

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter