The Other Side of China Business

We have watched while Chinese companies have sought to expand boldly overseas through M&A. Lenovo taking over IBM's PC Division was one good example. The pursuit of Unocal, a large US energy company was a second example. And perhaps it conjured up visions of future Li Kai Sheng like deal-makers taking their trade surpluses and aggressively buying assets overseas, much like the Japanese buying Rockefeller Center or Pebble Beach, except in a more astute way--less focused on "trophies" and more focused on money-making. But alas, reality hits...many of you know that China Mobile had agreed in principle to purchase Millicom a cellular operator with 10Million subscribers in a number of emerging markets. See the article below from the WSJ:

China Mobile AgreementTo Acquire Millicom Fails
By JASON SINGER in London and KATE LINEBAUGH in Hong Kong Staff Reporters of THE WALL STREET JOURNALJuly 4, 2006
Millicom International Cellular SA ended talks with China Mobile Communications Corp. just hours before Millicom executives were due to fly to Beijing to announce the $5.3 billion sale of their company.

The planned acquisition by China Mobile, had it been completed, would have been the largest foreign purchase by any Chinese firm.

Millicom said in a prepared statement that negotiations ended because the buyer "won't be in a position within an acceptable timeframe to make a binding offer that is suitably attractive, given the current strong performance of the business."

The sudden collapse of a deal that had been in exclusive negotiations since May could have far-reaching implications for future Chinese deals, bankers say, as sellers are likely to be wary about Chinese bidders' lengthy bureaucratic process and their ability to follow-through on talks to complete a deal.

Millicom, of Luxembourg, operates wireless networks in 16 countries in Africa, Asia and Latin America. China Mobile conducted an extensive review of Millicom's businesses in each market, from Chad in Africa to El Salvador in Central America.
Millicom's shares, listed on the Nasdaq Stock Market, were down $12.10, or 27%, at $33.33 each in trading near the early close in the U.S.

People close to both sides said the due-diligence process, which took much longer than expected -- partly because China doesn't have diplomatic relations with all of the countries Millicom operates in -- was completed without any snags. Negotiations also dragged on while state-controlled China Mobile negotiated many layers of bureaucracy to gain approval for the purchase.

Executives from Millicom were due to fly to Beijing yesterday to announce a deal on Wednesday. An agreement would have given a key Chinese state-owned company instant access to new markets around the world and opened pathways for further business for many other suppliers that already do business with China Mobile at home.
But, following a China Mobile board meeting Sunday, the company said it had last-minute price concerns, people close to the matter said.
After seeing its business grow strongly in recent months -- including significant strides during the period China Mobile was reviewing the deal -- Millicom responded by announcing the talks had collapsed.

People close to the matter said the Chinese company had last-minute concerns over the disparate nature of Millicom's sprawling businesses and the challenges China Mobile would have in managing it. Millicom's top executives, however, were due to remain in place after the deal to continue running the businesses.

Millicom is controlled by Swedish investment firm Investment AB Kinnevik, which owns nearly 40% of the company. It said it "supports the decision by the board of Millicom to terminate all discussions concerning a potential sale of the company."
Millicom operates mobile-phone operations in many of the world's poorest countries and has about 10 million subscribers. The market for mobile operations like Millicom's have been in increasing demand by some of the world's biggest operators looking to enter the world's few remaining fast-growing markets.

A deal would have been the first foray by China Mobile, the world's largest cellular operator by subscribers, outside of its home market.
While the two companies were negotiating the deal, asset prices across emerging markets fell sharply, which added to concerns at China Mobile that Millicom was seeking too high a price, according to people familiar with the deal. "They really liked the business. They just refused to pay a big premium," a person close to the talks said of the Chinese company.

China Mobile officials couldn't be reached to comment.
Bankers also said it is difficult for the management of state-owned enterprises to take the leap on a big deal for fear of facing criticism at home. "There are issues with the politics of state-owned enterprises and risk-taking," said a person close to the talks.

China Mobile's management, like those of the other state-owned companies, has to consider the reaction of several Chinese agencies in considering whether to go ahead with such a large deal.
The state-owned Assets Supervision and Administration Commission controls China Mobile and other state-owned companies. China Mobile also answers to the Ministry of Information Industry, which regulates China's telecom sector. And deals involving foreign exchange -- the Millicom deal was to be paid in dollars -- require a separate agency's approval. Ensuring that all sides within the China's bureaucracy are supportive of such a large acquisition is difficult, these people said.