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China Mobile International M&A Activity 2000
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Download source fileThe Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this announcement, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.
This announcement is not an offer to sell or the solicitation of an offer to buy any securities. Securities may not be offered or sold in the United States absent registration or an exemption from registration. The Company plans to file a registration statement relating to proposed offerings of equity and debt securities in the United States. These offerings of securities to be made in and outside of the United States will be made by means of a prospectus which will be sent to shareholders of the Company and may be obtained from the Company. The prospectus will contain detailed information about the Group and management, as well as financial statements.
CHINA MOBILE (HONG KONG) LIMITED
(Incorporated in Hong Kong with limited liability under the Companies Ordinance)
VERY SUBSTANTIAL ACQUISITION AND
CONNECTED TRANSACTIONS
SUMMARY
The Acquisition
China Mobile (Hong Kong) Limited (the "Company") entered into a conditional sale and purchase agreement on 4 October 2000 (the "Acquisition Agreement") to acquire, subject to certain conditions, from China Mobile Hong Kong (BVI) Limited ("CMBVI"), the Company's immediate controlling shareholder, the mobile communications businesses owned by China Mobile Communications Corporation ("CMCC") in Beijing, Shanghai, Tianjin, Hebei, Liaoning, Shandong and Guangxi. CMCC indirectly owns 100% of the issued share capital of CMBVI.
The Target Companies are the leading providers of mobile communications services in their respective provinces, municipalities and autonomous region. As of 20 September 2000, the Target Companies had a total of approximately 15.4 million subscribers. Their average market share was approximately 80.0% in the seven provinces, municipalities and autonomous region in which they operate as of 30 June 2000. As of that date, Beijing Mobile had approximately 1.99 million subscribers, Shanghai Mobile had approximately 2.03 million subscribers, Tianjin Mobile had approximately 0.82 million subscribers, Hebei Mobile had approximately 2.02 million subscribers, Liaoning Mobile had approximately 2.82 million subscribers, Shandong
Mobile had approximately 2.79 million subscribers and Guangxi Mobile had approximately 1.17 million subscribers, which represented estimated market shares of approximately 80.0%, 78.8%, 83.7%, 83.3%, 75.4%, 77.3%, and 95.5% in their respective provinces, municipalities and autonomous region.
The total purchase price of the Acquisition is HK$256,021 million (equivalent to approximately US$32,840 million). The Company will pay HK$79,291 million (equivalent to approximately US$10,171 million) of the total purchase price in cash and the remainder of HK$176,730 million (equivalent to approximately US$22,669 million) in the form of new shares of HK$0.10 each in the share capital of the Company to be issued by the Company to CMBVI. The Company may, prior to the completion of the Acquisition, elect to increase the number of new Shares to be issued to CMBVI, which shall reduce the cash portion of the total purchase price, provided that following completion of the Acquisition and the issue of new Shares to CMBVI, CMBVI's shareholding in CMHK will not exceed 76.5%. The Company intends to finance the cash portion of the purchase price primarily using existing internal cash resources, Renminbi-denominated syndicated bank loans and the net proceeds of the proposed Share Offering and Convertible Note Offering (each as described below). The balance of the cash portion of the purchase price will be satisfied from additional internal resources, other forms of funding, or if elected by the Company, replaced with the issue of additional new Shares to CMBVI as described above.
CMBVI currently owns approximately 75% of the issued share capital of the Company. The net asset value of the Group as at 31 December 1999 was approximately HK$53,739 million. Accordingly, under The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the "Stock Exchange") (the "Listing Rules"), the Acquisition constitutes both a very substantial acquisition and a connected transaction for the Company and is conditional upon, among other things, the approval of the Acquisition, the issue of the Consideration Shares (as defined below) to CMBVI and the Connected Transactions (as defined below) by the shareholders of the Company, other than CMBVI and its associates (as defined in the Listing Rules) (the "Independent Shareholders"), and the approval by the shareholders of the Company of the increase in authorised share capital of the Company, at an extraordinary general meeting of shareholders of the Company to be convened for this purpose.
An Independent Board Committee (as defined below) has been established to advise the Independent Shareholders as to whether the terms of the Acquisition, the mechanism for the determination of the issue price of the Consideration Shares and the Connected Transactions are fair and reasonable from a financial perspective so far as the Independent Shareholders are concerned. N M Rothschild & Sons (Hong Kong) Limited ("Rothschild") has been retained as the independent financial adviser to the Independent Board Committee.
China International Capital Corporation (Hong Kong) Limited and Goldman Sachs (Asia) L.L.C. are the financial advisers to the Company in respect of the Acquisition.
Connected Transactions
The Company, its existing subsidiaries and each of the Target Companies have entered into certain operating and other agreements with certain connected persons which constitute, or will after the completion of the Acquisition constitute, connected transactions under Chapter 14 of the Listing Rules.
As these connected transactions (the "Connected Transactions") are expected to occur on a regular and continuous basis in the ordinary and usual course of business, the Company has made an application to the Stock Exchange for a waiver from compliance with the normal approval and disclosure requirements related to connected transactions under the Listing Rules.
Despatch of Shareholders' Circular
A circular containing, among other things, details of the terms of the Acquisition, the issue of the Consideration Shares and the Connected Transactions, a letter from the Independent Board Committee, a letter from Rothschild, further financial information of the Target Companies, extracts from the preliminary prospectus for the proposed Share Offering and Convertible Note Offering and a notice to shareholders of the Company convening an extraordinary general meeting to approve, among other things, the terms of the Acquisition, the issue of the Consideration Shares, the Connected Transactions and an increase in the authorised share capital of the Company, will be despatched to the shareholders and, for information only, noteholders of the Company as soon as practicable.
Proposed Share Offering and Convertible Note Offering
The Company proposes to file publicly, on or about 4 October 2000, a registration statement on Form F-3 with the United States Securities and Exchange Commission relating to a proposed offering of Shares and American depositary shares, which is expected to raise approximately US$6,575 million (equivalent to approximately HK$51,255 million), and a proposed offering of convertible notes, which is expected to raise approximately US$600 million (equivalent to approximately HK$4,678 million). See "The Proposed Share Offering, Convertible Note Offering and Bank Loans" below.
Proposed Strategic Alliance with Vodafone
On 4 October 2000, the Company entered into a non-binding memorandum of understanding with Vodafone Group Plc. ("Vodafone"), which sets forth the principal terms of cooperation between them in relation to mobile voice and data communications services. The memorandum of understanding contemplates, among other things, the sharing of management experience, exchange of other human resources, technical cooperation, exclusive technology licensing to the Company in China and sharing of expertise at the operational level. Vodafone has concurrently agreed to purchase, as part of the Share Offering, Shares with an aggregate purchase price of US$2,500 million (equivalent to approximately HK$19,490 million) at the offering price in the Share Offering. See "Proposed Strategic Alliance with Vodafone" below.
THE ACQUISITION AGREEMENT
Date:
4 October 2000
Parties:
Vendor: China Mobile Hong Kong (BVI) Limited
Warrantor: China Mobile Communications Corporation
Purchaser: China Mobile (Hong Kong) Limited
Transaction:
The Company has agreed, subject to certain conditions, to acquire from CMBVI the entire issued share capital of each of the following companies:
(a) Beijing Mobile (BVI) Limited
(b) Shanghai Mobile (BVI) Limited
(c) Tianjin Mobile (BVI) Limited
(d) Hebei Mobile (BVI) Limited
(e) Liaoning Mobile (BVI) Limited
(f) Shandong Mobile (BVI) Limited
(g) Guangxi Mobile (BVI) Limited
CMBVI is the sole legal and beneficial owner of the entire issued share capital of each of the Target BVI Companies.
Each of the Target BVI Companies was incorporated by CMBVI on 1 September 2000 in the British Virgin Islands with limited liability. The sole business of the Target BVI Companies is investment holding in the respective Target Companies.
Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and Guangxi Mobile were established on 26 July 2000, 4 August 2000, 24 July 2000, 31 July 2000, 7 August 2000, 7 August 2000 and 3 August 2000, respectively. Pursuant to a series of transfers effected on 30 September 2000, CMCC, through CMHKG and CMBVI, transferred its entire interests in the Target Companies to the respective Target BVI Companies. CMCC owns 100% of the voting share capital and economic interest of CMHKG which, in turn, owns 100% of CMBVI.
The Acquisition is in respect of the entire issued share capital of all seven Target BVI Companies. Unless the entire issued share capital of all seven Target BVI Companies can be acquired, the Acquisition will not proceed. Upon completion of the Acquisition, each of the Target BVI Companies will become a wholly-owned subsidiary of the Company.
The following depicts the corporate structure of the Company, with its principal subsidiaries, immediately before the proposed Share Offering and Convertible Note Offering, the restructuring in preparation for the Acquisition and the Acquisition:
(1) CMCC owns all of the issued voting share capital of and economic interest in CMHKG.
(2) China Mobile (Shenzhen), a wholly-owned subsidiary of the Company incorporated in mainland China, was established in June 2000 to improve profit monitoring and financial management of the Company's operating subsidiaries in mainland China, to handle roaming and interconnection clearing and settlement among such subsidiaries and among such subsidiaries and other subsidiaries of CMCC, and to conduct research and development relating to wireless data communications.
Consideration and Payment
The total purchase price of the Acquisition is HK$256,021 million (equivalent to approximately US$32,840 million), to be paid by the Company with a combination of cash and Consideration Shares as follows:
(a) HK$79,291 million (equivalent to approximately US$10,171 million) in the form of cash; and
(b) HK$176,730 million (equivalent to approximately US$22,669 million) to be satisfied by the allotment by the Company to CMBVI of the Consideration Shares, credited as fully paid, the number of such Shares to be determined by dividing this amount by the offer price per Share of the proposed Share Offering.
As a result of the Acquisition, the Company will also assume the net indebtedness of the Target Companies, which amounted to approximately HK$9,043 million (equivalent to approximately US$1,160 million) as of 30 June 2000.
The Company may, prior to the completion of the Acquisition, elect to increase the number of Consideration Shares, which shall reduce the cash portion of the total purchase price, provided that following completion of the Acquisition and the issue of the total number of Consideration Shares to CMBVI, CMBVI's shareholding in CMHK will not exceed 76.5% (which is CMBVI's maximum shareholding percentage in CMHK permitted by the Stock Exchange according to waivers granted by the Stock Exchange in 1997). If the number of Consideration Shares to be allotted to CMBVI is so increased pursuant to such election, the cash portion will be reduced correspondingly to keep the total purchase price the same. In such a case, the balance of the cash portion of the total purchase price to be satisfied from additional internal resources and other forms of funding may be reduced. The Company will inform Shareholders by way of announcement as soon as practicable following the making of an election described above.
The Company will apply to the Stock Exchange for the listing of, and permission to deal in, the Consideration Shares.
The Acquisition Agreement was negotiated and entered into on an arm's length basis based on normal commercial terms. The above consideration was determined based on various factors, including the prospective adjusted EBITDA and prospective profit contributions of the Target Companies to the Combined Group, the quality of the assets being acquired, their growth prospects, earnings potential, competitive advantages in their respective markets and relevant valuation benchmarks.
The consideration will represent a multiple of 40 times the combined 1999 earnings before write-down and write-off of fixed assets, 101 times the combined 1999 earnings after write-down and write-off of fixed assets and 33 times the combined 2000 forecast earnings of the Target Companies and will represent a multiple of 20 times the combined 1999 adjusted EBITDA and 15 times combined 2000 forecast adjusted EBITDA of the Target Companies. The consideration will represent approximately US$1,898 (equivalent to approximately HK$14,799) per subscriber based on a forecast of 17.3 million subscribers by the end of 2000. The forecast combined earnings and combined adjusted EBITDA of the Target Companies are based on certain prospective financial information prepared by the Company and the Target Companies.
Conditions of the Acquisition:
Completion of the Acquisition Agreement is conditional upon the fulfilment of the following conditions on or before 31 December 2000, or such later date as CMBVI, the Company and CMCC shall agree:
(a) the passing of resolutions by the Independent Shareholders approving the Acquisition, the issue of the Consideration Shares to CMBVI and the Connected Transactions, and the passing of a resolution by the Shareholders approving the increase in authorised share capital of the Company;
(b) the Company having received adequate funding or financing to satisfy the cash portion of the total purchase price of the Acquisition;
(c) the granting by the Listing Committee of the Stock Exchange of the listing of, and permission to deal in, the Consideration Shares to be issued by the Company upon completion of the Acquisition;
(d) there having been no material adverse change to the financial conditions, business operations or prospects of any of the Target BVI Companies or the Target Companies; and
(e) the receipt of various approvals from relevant PRC regulatory authorities.
Completion of the Acquisition:
The Acquisition shall be completed following the satisfaction (or waiver) of the above conditions, and is expected to take place on the date of the completion of the proposed Share Offering and Convertible Note Offering, or the business day in Hong Kong and PRC next following the passing of the ordinary resolutions set out in the Shareholders' circular, whichever is later, or such other date as may be agreed between CMBVI and the Company following notification by the Company to CMBVI of the fulfilment to the satisfaction of the Company (or waiver) of all the conditions precedent. If any of the above-mentioned conditions is not satisfied or waived by 31 December 2000, or such other date as CMBVI, the Company and CMCC may agree, the Acquisition Agreement shall lapse.
The following depicts the corporate structure of the Company, with its principal subsidiaries, immediately following completion of the Acquisition and the proposed Share Offering and Convertible Note Offering:
(1) CMCC owns all of the issued voting share capital of and economic interest in CMHKG.
(2) CMBVI's percentage interest in CMHK immediately after the completion of the Acquisition and the proposed Share Offering and Convertible Note Offering will depend on, among other things, the issue price of the Consideration Shares which, in turn, will be equivalent to the offer price of the new Shares and the ADSs in the proposed Share Offering. However, it is expected that immediately following completion of the Acquisition, the proposed Share Offering and Convertible Note Offering (assuming that the underwriters' over-allotment option in the Share Offering is exercised in full and there is no conversion of the convertible notes proposed to be issued under the proposed Convertible Note Offering), CMBVI's shareholding in CMHK will be approximately 75% in any event but will not exceed 76.5%.
REASONS FOR AND BENEFITS OF THE ACQUISITION
The Acquisition represents an attractive opportunity for the Group to consolidate its strong position and further capitalise on the growth potential of the Chinese telecommunications industry. Each of the Target Companies is the leading provider of mobile telecommunications services in its respective region. The Acquisition will further consolidate the Group's overall market position.
The Target Companies have experienced significant growth in the total number of subscribers from approximately 3.7 million as of 31 December 1997 to approximately 15.4 million as of 20 September 2000. However, the cellular penetration rates in these regions are relatively low compared to those of other Asian and international markets. As of 30 June 2000, the cellular penetration rate was approximately 19.7% for Beijing, 17.4% for Shanghai, 10.2% for Tianjin, 3.7% for Hebei, 8.9% for Liaoning, 4.1% for Shandong and 2.6% for Guangxi. The directors of the Company believe that these rates indicate significant potential for subscriber growth in these regions.
Following the completion of the Acquisition, the Combined Group will have a geographically contiguous market covering all of the coastal regions of mainland China. Based on information as of 30 June 2000, the subscribers of the Group will increase from approximately 21.6 million before the Acquisition, or 34.3% of all cellular subscribers in mainland China as of such date, to approximately 35.3 million after the Acquisition, or 55.9% of all cellular subscribers in mainland China as of such date. The Acquisition will increase the population under the Group's network coverage from approximately 326 million, or 25.7% of mainland China's total population, to approximately 607 million people, or 48.0% of mainland China's total population as of such date. The directors of the Company believe that the Acquisition will provide a solid foundation for its future growth.
The directors of the Company believe that the Acquisition will enhance the Group's growth prospects, further consolidate its strong position in the mobile telecommunications market in mainland China and create value for investors.
THE PROPOSED SHARE OFFERING, CONVERTIBLE NOTE OFFERING AND BANK LOANS
The cash portion of the total purchase price of the Acquisition may be paid with a combination of U.S. dollars, Hong Kong dollars or Renminbi. Of such amount, the Company intends that:
(a) approximately US$500 million (equivalent to approximately HK$3,898 million) will be funded by the existing internal cash resources of the Company;
(b) approximately US$1,510 million (equivalent to approximately HK$11,772 million) will be financed by a Renminbi-denominated syndicated bank loans;
(c) approximately US$600 million (equivalent to approximately HK$4,678 million) (assuming that the underwriters' option to purchase additional convertible notes in the Convertible Note Offering described below is not exercised) will be financed by the proceeds of an offering of U.S. dollar-denominated convertible notes;
(d) approximately US$6,575 million (equivalent to approximately HK$51,255 million) (assuming that the underwriters' over-allotment option in the Share Offering described below is not exercised) will be financed by the proceeds of an offering of American depository shares (the "ADSs") and/or new Shares, comprising;
US$2,500 million (equivalent to approximately HK$19,490 million) to Vodafone pursuant to the Strategic Placing; and
US$4,075 million (equivalent to approximately HK$31,765 million) to other investors in the Share Offering; and
(e) the remainder will be paid from additional internal resources and other forms of funding, or if elected by the Company, replaced with the issue of additional new Shares to CMBVI as described in the section headed "The Acquisition Agreement Ñ Consideration and Payment".
For illustrative purposes only, assuming that the Company elects to satisfy the entire remaining balance of the cash portion of the purchase price by increasing the number of Consideration Shares to be issued to CMBVI as described above, and assuming that the ADSs and/or Shares offered pursuant to the Share Offering and the Consideration Shares are issued at HK$51 per Share, being the closing price of the Shares on the Stock Exchange on 3 October 2000, the total number of Consideration Shares to be issued to CMBVI will represent approximately 26.4% of the existing issued share capital and 19.7% of the enlarged issued share capital of the Company and CMBVI's shareholding will represent approximately 75.8% of the enlarged issued share capital of the Company immediately after completion of the Share Offering and the issue of the Consideration Shares (assuming that the underwriters' over-allotment option in the Share Offering is not exercised and there is no conversion of the convertible notes to be issued under the proposed Convertible Note Offering).
Each ADS is equal to five ordinary shares of the Company. It is currently expected that approximately US$6,575 million (equivalent to approximately HK$51,255 million) will be raised under the proposed Share Offering. It is expected that the underwriters of the proposed Share Offering will be granted an over-allotment option of up to 15% of the initial size of the proposed Share Offering (which amounted to approximately US$986 million (equivalent to approximately HK$7,688 million)) which will be exercisable within 28 days of the date of the Prospectus. For illustrative purposes only, assuming that the ADSs and/or Shares offered pursuant to the proposed Share Offering and the Consideration Shares are issued at HK$51 per Share, being the closing price of the Shares on the Stock Exchange on 3 October 2000, the new ADSs and/or Shares to be offered pursuant to the proposed Share Offering will represent approximately 7.3% of the existing issued share capital and 5.5% of the enlarged issued share capital of the Company immediately after completion of the proposed Share Offering and Convertible Note Offering and the issue of the Consideration Shares (assuming that the underwriters' over-allotment option in the Share Offering is not exercised and there is no conversion of convertible notes to be issued under the proposed Convertible Note Offering). Assuming that the over-allotment option is exercised in full and that the ADSs and/or Shares offered pursuant to the proposed Share Offering, including those issued to cover the over-allotment option, and the Consideration Shares are issued at HK$51 per Share, the ADSs and/or Shares to be offered pursuant to the proposed Share Offering will represent approximately 8.4% of the existing issued share capital and 6.3% of the enlarged issued share capital of the Company after completion of the proposed Share Offering and Convertible Note Offering and the issue of the Consideration Shares (assuming there is no conversion of convertible notes to be issued in the proposed Convertible Note Offering). The proceeds from the exercise of the underwriters' over-allotment option in the Share Offering will be used to finance the Acquisition or for general working capital purpose.
The Company will apply to the Stock Exchange for the listing of, and permission to deal in, the Shares (including the Shares underlying the ADSs) to be offered pursuant to the proposed Share Offering. Application will also be made to list the ADSs proposed to be offered on the New York Stock Exchange.
Under the proposed Convertible Note Offering, the Company currently intends to offer U.S. dollar-denominated convertible notes with an estimated principal amount of approximately US$600 million (equivalent to approximately HK$4,678 million). It is expected that the underwriters of the Convertible Note Offering will be granted an option, exercisable within 28 days of the date of the Prospectus to purchase up to an additional US$90 million (equivalent to approximately HK$702 million) principal amount of convertible notes from the Company. The percentage of issued share capital into which the convertible notes to be offered under the proposed Convertible Note Offering may convert will be disclosed by way of an announcement once the terms of the convertible notes have been finalised. Such an announcement will be made prior to the date on which the extraordinary general meeting of the Company to be convened to consider, among other things, the Acquisition, is to be held. The Company will be providing certain covenants in connection with the Convertible Note Offering. The Company has applied for the listing of the convertible notes on the Luxembourg Stock Exchange. The Company will also apply to the Stock Exchange for the listing of, and permission to deal in, the Shares to be issued upon conversion of the convertible notes.
The Company will ensure that each of the substantial shareholders and directors of the Company and their respective associates (as defined in the Listing Rules) will not subscribe for any of the convertible notes to be offered under the Convertible Note Offering and that, after the Convertible Note Offering, the Company will disclose to the Stock Exchange any dealings by any of the substantial shareholders and directors of the Company or their respective associates from time to time in the convertible notes upon the Company becoming aware of such dealings.
The proposed Share Offering and Convertible Note Offering will commence as soon as practicable and are expected to complete following the agreement by the Company with the underwriters of the proposed Share Offering and the underwriters of the Convertible Note Offering, respectively, of pricing and other terms of the respective offerings. The closing of the proposed Share Offering and the proposed Convertible Note Offering will not be inter-conditional. It is currently expected that the terms of issue of the Share Offering (including the number and price of the ADSs and Shares) will be determined around late October 2000 to early November 2000, the price being determined with reference to the then current market prices of the ADSs and Shares and the level of interest for the ADSs and Shares expressed by prospective investors. The terms of the convertible notes, including, but not limited to, the aggregate principal amount of the convertible notes, interest rates and conversion price have not yet been finalised and are also expected to be determined around late October 2000 to early November 2000. The new Shares to be offered in the Share Offering (including the Shares underlying the ADSs) and the Shares into which the convertible notes may convert will be issued under the general mandate granted to the directors of the Company at the annual general meeting of the Company held on 16 June 2000. Neither CMCC nor other connected persons of the Company will subscribe for the securities to be offered under the Share Offering or the Convertible Note Offering.
Further announcements will be made as soon as practicable following the date on which the sizes and other terms of the proposed Share Offering (including the number of Shares and/or ADSs to be issued pursuant thereto) and Convertible Note Offering are determined.
PROPOSED STRATEGIC ALLIANCE WITH VODAFONE
On 4 October 2000, the Company entered into a non-binding memorandum of understanding with Vodafone, which sets forth the principal terms for cooperation between them in relation to mobile voice and data communications services. The arrangements contemplated by the memorandum of understanding are subject to the entering into of a definitive agreement or agreements not later than 28 February 2001. The memorandum of understanding contemplates that the Company and Vodafone will cooperate in various areas as may be permitted by applicable Chinese laws and regulations, including:
(a) the sharing of management experience and exchange of human resources at various levels;
(b) technical cooperation among the parties and exclusive licensing by Vodafone to the Company in mainland China of technologies relating to mobile voice and data communications; and
(c) operational cooperation focusing on the exchange of expertise relating to subscriber management, marketing, branding, network operations, procurement, and research and development of advanced mobile data applications and services.
Separately, the Company and Vodafone will also explore suitable opportunities for joint ventures and other equity-based strategic alliances, subject to separate negotiations and agreement with other relevant parties, and to the extent permitted by applicable Chinese laws and regulations. This will include the areas of research and development of wireless data services, international investment opportunities outside of China, and regional and/or global alliances. In addition, the memorandum of understanding contemplates the establishment of a multi-layer strategic alliance governance structure, which could comprise an executive-level chairmen's forum consisting of the Chairman and Chief Executive Officer of the Company, Mr. Wang Xiaochu and Mr. Chris Gent, the Chief Executive of Vodafone, a steering committee of senior management who will meet on a regular basis, and several project working groups to develop detailed project proposals.
The Company intends to make Vodafone its preferred partner for any form of cooperation that falls within the scope of the memorandum of understanding.
According to publicly available information, Vodafone is the world's largest mobile telecommunications company in terms of subscribers. Vodafone has a global portfolio with operations in 25 countries around the world, across five continents. At the end of September 2000, Vodafone reported a proportionate worldwide customer base of approximately 66 million.
The Company believes that, if definitive agreements are successfully concluded, this proposed strategic alliance would enhance the Company's strengths in the telecommunications market in mainland China, as well as better position the Company for further expansion opportunities, if appropriate, globally. Furthermore, the Company believes that it would benefit from the exchange of experiences and managerial technical and operational resources with Vodafone, including access to leading technologies and the sharing of management and operational expertise. The exchange of human resources also enhances the Company's strategy of nurturing its human capital. However, no assurance can be provided by the Company that definitive agreements will be successfully concluded, that any necessary government approvals for specific terms would be obtained, or that, if concluded, the definitive agreements would encompass the same scope of cooperation as that contemplated by the memorandum of understanding.
At the same time, the Company also entered into the Strategic Investor Placing Agreement with Vodafone, under which Vodafone has agreed to purchase, as part of the Share Offering, Shares with an aggregate purchase price of US$2,500 million (equivalent to approximately HK$19,490 million) at the offering price in the Share Offering. For illustrative purposes only, assuming that the ADSs and/or Shares offered pursuant to the proposed Share Offering are issued at HK$51 per Share, being the closing price of the Shares on the Stock Exchange on 3 October 2000, Vodafone will purchase 382,156,863 Shares, representing 38.03% of the total number of Shares offered in the Share Offering (or 33.07% if the underwriters' over-allotment option in the Share Offering is exercised in full). Vodafone has agreed that without the consent of, inter alia, the Company, it will not directly or indirectly offer, sell, pledge or otherwise dispose of any of such Shares that it purchases for a period of at least 180 days from the date of the Prospectus. Vodafone will not become entitled to nominate or appoint any person to be a director of the Company as a result or through its purchase of such Shares. The Strategic Investor Placing Agreement is conditional upon underwriting agreements for the Share Offering being entered into and having become unconditional by no later than 31 December 2000, but is not dependent on the conclusion of the definitive agreements contemplated by the memorandum of understanding with Vodafone described above.
INFORMATION ON THE TARGET COMPANIES
Operations of the Target Companies
The Target Companies are the leading providers of mobile telecommunications services in their respective provinces, municipalities and autonomous region. The Target Companies offer mobile communications services principally using GSM technology, and their networks reach all cities and counties and most major roads and highways in their respective geographical regions. Each of the Target Companies is also a major provider of Internet Protocol communications services and wireless data services in the geographical region in which it serves.
The following table sets forth certain demographic and industry data for Beijing, Shanghai, Tianjin, Hebei, Liaoning, Shandong and Guangxi for the periods indicated:
| As of or for the year | |||
| ended 31 December | |||
| 1997 | 1998 | 1999 | |
| Population (in thousands)(1) | |||
| Beijing | 12,400 | 12,460 | 12,570 |
| Shanghai | 14,570 | 14,640 | 14,740 |
| Tianjin | 9,530 | 9,570 | 9,590 |
| Hebei | 65,250 | 65,690 | 66,140 |
| Liaoning | 41,380 | 41,570 | 41,710 |
| Shandong | 87,850 | 88,380 | 88,830 |
| Guangxi | 46,330 | 46,750 | 47,130 |
| GDP per capita (RMB)(1) | |||
| Beijing | 16,735 | 18,482 | 19,803 |
| Shanghai | 25,750 | 28,253 | 30,805 |
| Tianjin | 13,796 | 14,808 | 15,932 |
| Hebei | 6,079 | 6,525 | 6,913 |
| Liaoning | 8,525 | 9,333 | 9,958 |
| Shandong | 7,590 | 8,120 | 8,648 |
| Guangxi | 4,356 | 4,076 | 4,264 |
| Cellular penetration (%)(2) | |||
| Beijing | 5.5 | 9.5 | 14.9 |
| Shanghai | 4.9 | 8.1 | 12.8 |
| Tianjin | 2.9 | 5.1 | 8.7 |
| Hebei | 0.7 | 1.4 | 2.2 |
| Liaoning | 1.6 | 3.2 | 6.1 |
| Shandong | 0.9 | 1.7 | 2.8 |
| Guangxi | 0.7 | 1.1 | 1.6 |
| Fixed line penetration (%)(3) | |||
| Beijing | 20.2 | 25.1 | 29.9 |
| Shanghai | 26.0 | 29.5 | 32.9 |
| Tianjin | 14.2 | 17.3 | 21.3 |
| Hebei | 5.0 | 6.1 | 7.4 |
| Liaoning | 9.5 | 11.5 | 13.9 |
| Shandong | 4.7 | 6.0 | 7.9 |
| Guangxi | 3.0 | 3.6 | 4.5 |
(1) Source: 1998 China Statistical Yearbook, 1999 China Statistical Yearbook and 2000 China Statistical Abstract.
(2) Calculated based on the Company's estimate of the total number of mobile subscribers, including subscribers of other operators.
(3) Source: the MII.
Beijing, Shanghai and Tianjin are municipalities directly administered by the Chinese central government. They are among the most economically developed cities in China, and have significantly higher per capita incomes. Beijing Mobile, Shanghai Mobile and Tianjin Mobile began providing mobile telecommunications services in the late 1980s.
Subscribers and Usage
The Target Companies had a total of approximately 15.4 million cellular subscribers as of 20 September 2000. Their average market share was approximately 80.0% in the seven provinces, municipalities and autonomous region in which they operate as of 30 June 2000.
The following table sets forth selected historical information about the subscriber base (including subscribers for the prepaid services) of the Target Companies for the periods indicated:
Subscriber Base and Related Information
| As of or for the | |||||||||||
| As of or for the year ended | six months | ||||||||||
| 31 December | ended 30 June | ||||||||||
| 1997 | 1998 | 1999 | 2000 | ||||||||
| Subscribers (in thousands) | |||||||||||
| Beijing | 613 | 1,007 | 1,565 | 1,994 | |||||||
| Shanghai | 648 | 1,008 | 1,506 | 2,028 | |||||||
| Tianjin | 249 | 430 | 721 | 824 | |||||||
| Hebei | 448 | 865 | 1,367 | 2,021 | |||||||
| Liaoning | 677 | 1,290 | 2,122 | 2,818 | |||||||
| Shandong | 751 | 1,364 | 2,094 | 2,790 | |||||||
| Guangxi | 312 | 507 | 747 | 1,169 | |||||||
| Total | 3,699 | 6,471 | 10,121 | 13,643* | |||||||
| Average churn rate (%)(1) | |||||||||||
| Beijing | 3.3 | 8.5 | 8.9 | 4.9 | |||||||
| Shanghai(2) | 7.3 | 7.9 | 11.0 | 2.5 | |||||||
| Tianjin(2) | 3.0 | 5.8 | 12.0 | 12.5 | |||||||
| Hebei | 12.7 | 12.9 | 11.5 | 5.3 | |||||||
| Liaoning | 3.4 | 2.5 | 5.8 | 8.8 | |||||||
| Shandong | 2.8 | 3.0 | 3.7 | 7.6 | |||||||
| Guangxi | 3.0 | 6.6 | 7.2 | 3.4 | |||||||
| Market share (%)(3) | |||||||||||
| Beijing | 90.4 | 85.1 | 83.8 | 80.0 | |||||||
| Shanghai | 90.4 | 85.1 | 79.9 | 78.8 | |||||||
| Tianjin | 90.9 | 88.7 | 86.8 | 83.7 | |||||||
| Hebei | 98.3 | 96.5 | 93.7 | 83.3 | |||||||
| Liaoning | 100.0 | 97.7 | 82.8 | 75.4 | |||||||
| Shandong | 94.7 | 90.9 | 84.1 | 77.3 | |||||||
| Guangxi | 99.4 | 99.0 | 98.5 | 95.5 | |||||||
| Minutes of usage (in billions) | |||||||||||
| Beijing | 2.4 | 4.2 | 6.0 | 4.0 | |||||||
| Shanghai | 2.9 | 4.1 | 5.3 | 3.3 | |||||||
| Tianjin | 1.1 | 1.5 | 2.0 | 1.4 | |||||||
| Hebei | 1.7 | 2.7 | 4.5 | 2.8 | |||||||
| Liaoning | 2.7 | 4.4 | 6.1 | 4.1 | |||||||
| Shandong | 2.0 | 4.6 | 6.6 | 4.4 | |||||||
| Guangxi | 1.2 | 2.0 | 2.8 | 1.7 | |||||||
| Average minutes of usage per | |||||||||||
| subscriber per month(4) | |||||||||||
| Beijing | 446 | 435 | 398 | 376 | |||||||
| Shanghai | 492 | 416 | 370 | 312 | |||||||
| Tianjin | 469 | 376 | 304 | 299 | |||||||
| Hebei | 408 | 343 | 319 | 289 | |||||||
| Liaoning | 425 | 369 | 311 | 284 | |||||||
| Shandong | 309 | 361 | 316 | 306 | |||||||
| Guangxi | 424 | 410 | 382 | 300 | |||||||
| Average revenue per subscriber per | |||||||||||
| month (RMB)(5) | |||||||||||
| Beijing | 536 | 448 | 369 | 310 | |||||||
| Shanghai | 358 | 270 | 295 | 263 | |||||||
| Tianjin | 326 | 287 | 249 | 207 | |||||||
| Hebei | 353 | 311 | 264 | 214 | |||||||
| Liaoning | 407 | 298 | 232 | 175 | |||||||
| Shandong | 336 | 268 | 231 | 201 | |||||||
| Guangxi | 341 | 258 | 253 | 212 |
* 15.4 million as of 20 September 2000.
(1) Measures the rate of subscriber disconnections from mobile telephone service, determined by dividing (A) the sum of voluntary and involuntary deactivations (excluding deactivations due to subscribers switching from one of the contract services offered by the Target Companies to another) during the relevant period by (B) the average number of subscribers during the period (calculated as the average at the beginning and end of the year (in the case of 1997 and 1998), and at the beginning of the year and the end of each calendar month (in the case of 1999 and the six months ended 30 June 2000)). On this basis, the calculated churn rate will be affected by the number of voluntary and involuntary deactivations and the significant growth in subscriber base. The upward trend in churn rate is attributable in part, to tightened credit control policies and the compulsory termination of services where accounts are overdue for six or more months. The Target Companies began offering prepaid services in late 1999 or 2000. Some of the subscribers of the Target Companies had switched from the Target Companies' contract services to their prepaid service, which does not require subscriber registration. Since the exact number of such subscribers cannot be ascertained, the above churn rate accounts for them as churn subscribers, even though they continue to be subscribers of the Target Companies.
(2) In 1999, Tianjin Mobile and Shanghai Mobile deactivated services for subscribers whose accounts had been overdue for more than six months. Those involuntary deactivations resulted in significantly higher churn rates.
(3) Calculated based on total number of cellular subscribers in the relevant geographical region estimated by the Company.
(4) Calculated by (i) dividing the total minutes of usage during the relevant period by the average number of subscribers during the period (calculated in the same manner as note (1) above) and (ii) dividing the result by the number of months in the period.
(5) Calculated by (i) dividing the operating revenue during the relevant period by the average number of subscribers during the period (calculated in the same manner as note (1) above) and (ii) dividing the result by the number of months in the period.
Total minutes of usage for the Target Companies increased significantly from 1997 to 1999. However, the average monthly usage and revenue per subscriber for the Target Companies have declined over the last few years as cellular penetration has increased, and the subscriber base of the Target Companies as a whole has extended to include more low-usage subscribers. As connection fees for mobile communications services in mainland China have declined significantly in recent years, the cost for mobile users to switch among cellular networks has also decreased. This, together with increased competition, has contributed to the increase in the Target Companies' churn rates since 1997.
The Company believes that, on the bases and assumptions set forth in the Prospectus and in the absence of unforeseen circumstances, the Target Companies will have approximately 17.3 million subscribers in total by the end of 2000. This subscriber projection necessarily is based upon a number of assumptions and estimates that, while presented with numerical specificity and considered reasonable by the Company, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control. This subscriber projection may vary materially from the actual subscriber number of these companies.
Contract Subscribers
The following table sets forth the total number of contract cellular subscribers of the Target Companies for the periods indicated:
| As of 31 December | As of 30 June | |||||||||
| 1997 | 1998 | 1999 | 2000 | |||||||
| Contract subscribers (in thousands) | ||||||||||
| Beijing | 613 | 1,007 | 1,565 | 1,802 | ||||||
| Shanghai | 648 | 1,008 | 1,506 | 1,723 | ||||||
| Tianjin | 249 | 430 | 721 | 784 | ||||||
| Hebei | 448 | 865 | 1,367 | 1,732 | ||||||
| Liaoning | 677 | 1,290 | 2,122 | 2,493 | ||||||
| Shandong | 751 | 1,364 | 2,094 | 2,596 | ||||||
| Guangxi | 312 | 507 | 747 | 1,150 | ||||||
| Total | 3,699 | 6,471 | 10,121 | 12,280 |
Prepaid Services
In the second half of 1999, the Target Companies introduced prepaid services that are similar to the prepaid services offered by the Group in terms of scope and nature of service, tariffs and value adding capability and settlement. As of 30 June 2000, the Target Companies had an aggregate of approximately 1.4 million subscribers for their prepaid services, representing approximately 10.0% of the total subscriber base of the Target Companies as of that date. The following table sets forth the total number of prepaid subscribers of the Target Companies as of 30 June 2000:
| As of 30 June 2000 | ||||||||
| Beijing | Shanghai | Tianjin | Hebei | Liaoning | Shandong | Guangxi | Total | |
| Prepaid subscribers | ||||||||
| (in thousands) | 192 | 305 | 40 | 289 | 325 | 194 | 19 | 1,363 |
| As a percentage of | ||||||||
| All subscribers (%) | 9.6 | 15.0 | 4.9 | 14.3 | 11.5 | 7.0 | 1.6 | 10.0 |
Tariffs
The Target Companies have tariff structures for their services similar to those of the Group. The Group and the Target Companies are subject to the same regulatory framework with respect to tariffs.
The following table summarizes some of the current basic charges for the Target Companies' full service packages:
| Beijing | Shanghai | Tianjin | Hebei | Liaoning | Shandong | Guangxi | |
| (in RMB) | |||||||
| Contract subscribers | |||||||
| Connection fee(1) | 500 | 500 | 500 | 500 | 500 | 100 | 500 |
| Monthly fee(2) | 50 | 50 | 50 | 50 | 50 | 50 | 50 |
| Base usage charge(2) | |||||||
| (per minute) | 0.40 | 0.40 | 0.40 | 0.40 | 0.40 | 0.40 | 0.40 |
| Domestic roaming | |||||||
| charge (per minute) | 0.60 | 0.60 | 0.60 | 0.60 | 0.60 | 0.60 | 0.60 |
| Prepaid subscribers | |||||||
| Base usage charge | |||||||
| (per minute) | 0.60 | 0.60 | 0.60 | 0.60 | 0.60 | 0.60 | 0.60 |
| Domestic roaming | |||||||
| charge (per minute) | 0.80 | 0.80 | 0.80 | 0.80 | 0.80 | 0.80 | 0.80 |
(1) The Target Companies offer different service packages with different connection fee rates. From time to time and in their respective geographical regions, the Target Companies may also offer promotional connection fee rates, which could be substantially lower than the upper limit indicated in the table.
(2) The Target Companies also offer certain specialized packages, in particular TACS network packages that offer local access only service, which have lower monthly fees and base usage charges than those indicated above.
In addition, the Target Companies also charge long distance rates where applicable.
Connection fees charged by the Target Companies have been substantially reduced in the past three years, accompanying a reduction in the guidance prices for connection fees over that period as mobile operations in these geographical regions developed. However, the directors of the Company believe that while connection fee reductions may reduce revenue in the short term, they may help expand the subscriber base of the Target Companies and result in increased total subscriber usage, thereby contributing to revenue growth in the long term. Connection fees have become an increasingly less important source of the Target Companies' revenue. The directors of the Company expect that their importance will continue to decline.
The Target Companies do not charge connection fees and monthly fees for their prepaid services.
Interconnection
As with the Group's existing networks, the networks of each of the Target Companies interconnect with CTC's public fixed line network. Each of the Target Companies has an interconnection agreement with the relevant subsidiary of CTC that operates the fixed line network in its region. The economic terms of these agreements, including interconnection revenue sharing and settlement, are substantially similar to those that apply to the existing subsidiaries of the Company.
On 5 May 2000, the Company entered into an inter-provincial interconnection agreement with CMCC, which applies to its six existing operating subsidiaries. The Company has entered into a supplemental agreement with CMCC to provide that its interconnection agreement with CMCC will, subject to completion of the Acquisition and Independent Shareholders' approval, be extended to cover the Target Companies. See "Connected Transactions – Interconnection Arrangement" below.
Roaming
Each of the Target Companies provides roaming capabilities to its subscribers. Their GSM and TACS networks offer roaming capabilities throughout mainland China. In addition, their GSM networks offer roaming capabilities in 56 countries and regions around the world. The Company has entered into a supplemental agreement with CMCC to extend its existing roaming arrangements with CMCC for domestic and international roaming, subject to completion of the Acquisition and Independent Shareholders' approval, to cover the Target Companies. See "Connected Transactions – Roaming Arrangement" below.
Value Added Services and New Services
Each of the Target Companies offers a number of optional value added services and services based on new technology which are similar to those offered by the operating subsidiaries of the Company to their subscribers. These services include wireless data, IP telephony and "172" ISP services.
Customer Service, Billing and Credit Control
The after-sales customer support service centers of the Target Companies offer 24-hour service hotlines in their service areas, which provide customers with billing and service information, as well as receive customer reports of network problems.
The Target Companies do not require subscribers to pay a deposit before the initiation of local mobile services. Each of the Target Companies has implemented subscriber registration procedures, such as identity checks for individual customers and background checks for corporate customers, to assist in credit control. Direct debit services are available in each geographical region. Accounts are required to be settled on a monthly basis, and a late payment fee is imposed on each subscriber whose account is not paid by the monthly due date.
Service Distribution and Marketing
Distribution Channels. The Target Companies market their mobile services through an extensive network of authorized third-party dealers and through their own retail outlets. As of 30 June 2000, the Target Companies had 8,495 authorized third-party dealers and owned and operated 970 retail outlets, as set forth in the following table.
| Beijing | Shanghai | Tianjin | Hebei | Liaoning | Shandong | Guangxi | |||||||
| Authorized | |||||||||||||
| third-party dealers | 363 | 857 | 148 | 1,293 | 871 | 4,574 | 389 | ||||||
| Owned and Operated retail | |||||||||||||
| outlets | 5 | 35 | 12 | 233 | 70 | 270 | 345 | ||||||
| Total | 368 | 892 | 160 | 1,526 | 941 | 4,844 | 734 |
The authorized dealers market and sell mobile services for the Target Companies at prices determined by the Target Companies. In connection with these sales, the dealers pay to the Target Companies all related connection fees and other miscellaneous fees payable upon initial connection. The Target Companies in turn pay the dealers a fee of RMB150 to RMB300 per new contract subscriber acquired, as well as a commission for each prepaid card sold.
Brand Name. The Target Companies market their services under the "China Mobile" brand name, which is the marketing name used throughout mainland China by China Mobile Group. The Company has entered into a licence agreement with China Mobile Group for the use of the "China Mobile" logo in the markets where the Group currently operates. The Company has entered into a supplemental agreement with China Mobile Group to extend the arrangement under the licence agreement to the Target Companies if the Company acquired them. See "Connected Transactions – Licensing of Trademark" below.
Cellular Networks
The following table sets forth certain selected information regarding the GSM and TACS networks for each of the Target Companies as of 30 June 2000:
| Beijing | Shanghai | Tianjin | Hebei | Liaoning | Shandong | Guangxi | Total | ||||||||
| Subscribers | |||||||||||||||
| (in thousands) | |||||||||||||||
| GSM | 1,979 | 1,886 | 791 | 1,712 | 2,713 | 2,380 | 813 | 12,273 | |||||||
| TACS | 15 | 142 | 33 | 309 | 105 | 410 | 356 | 1,370 | |||||||
| Total | 1,994 | 2,028 | 824 | 2,021 | 2,818 | 2,790 | 1,169 | 13,643 | |||||||
| Voice channels | |||||||||||||||
| (in thousands) | |||||||||||||||
| GSM | 79 | 69 | 41 | 96 | 202 | 134 | 47 | 668 | |||||||
| TACS | 3 | 11 | 3 | 11 | 6 | 21 | 10 | 65 | |||||||
| Total | 82 | 80 | 44 | 107 | 208 | 155 | 57 | 733 | |||||||
| Mobile switching | |||||||||||||||
| centers | |||||||||||||||
| GSM | 15 | 21 | 9 | 40 | 51 | 44 | 11 | 191 | |||||||
| TACS | 1 | 7 | 2 | 11 | 14 | 15 | 10 | 60 | |||||||
| Total | 16 | 28 | 11 | 51 | 65 | 59 | 21 | 251 | |||||||
| Base station | |||||||||||||||
| controllers(1) | |||||||||||||||
| GSM | 88 | 84 | 27 | 69 | 111 | 36 | 18 | 433 | |||||||
| Base transceiver stations | |||||||||||||||
| GSM | 1,255 | 830 | 495 | 1,598 | 3,012 | 2,814 | 1,120 | 11,124 | |||||||
| TACS | 67 | 311 | 66 | 492 | 212 | 585 | 487 | 2,220 | |||||||
| Total | 1,322 | 1,141 | 561 | 2,090 | 3,224 | 3,399 | 1,607 | 13,344 |
(1) In a TACS system, the base transceiver stations are connected directly to the mobile switching centers. Accordingly, TACS networks do not utilize any base station controllers.
Similar to the existing subsidiaries of the Company, the Target Companies are also migrating their TACS subscribers to their GSM networks.
The TACS networks of the Target Companies use equipment primarily supplied by Ericsson and Motorola, while their GSM networks use equipment primarily supplied by Motorola, Nokia, Siemens, Alcatel and Ericsson.
Capital Expenditures
If the Acquisition is completed, the Company estimates that the Target Companies will require an aggregate of approximately RMB49.7 billion for capital expenditures from 2000 through the end of 2002 for the development, optimization and expansion of their GSM networks and the development and trial of new technology based services.
The following sets forth the planned total capital expenditure requirements of the Target Companies for the periods indicated. Actual future capital expenditures may differ form the amounts indicated below.
| (RMB in billions) | (US in billions) | ||||
| 2000 | 14.8 | 1.8 | |||
| 2001 | 16.7 | 2.0 | |||
| 2002 | 18.2 | 2.2 | |||
| Total | 49.7 | 6.0 |
Spectrum
The Target Companies have each been approved by the MII to use 24 MHz of spectrum in the 900 MHz frequency band to operate their cellular networks.
Each of the Target Companies has also obtained permission from the MII to use 10 MHz of spectrum in the 1800 MHz frequency band. They have each used this spectrum to introduce Digital Cellular System 1800 systems to expand the capacity of their GSM networks by adding cell sites in certain areas with a high density of cellular subscribers.
Transmission Infrastructure
The Target Companies lease intra-provincial and local transmission lines from CTC's subsidiaries that operate the fixed line networks in their respective regions, and pay to them fees based on tariff schedules stipulated by the relevant regulatory authorities after adjusting for the discount entitled by the Target Companies.
With respect to inter-provincial transmission lines, the Company has entered into a supplemental agreement with CMCC to extend the arrangement under the Company's agreement with CMCC entered into in May 2000 to the Target Companies subject to completion of the Acquisition and Independent Shareholders' approval. See "Connected Transactions Ñ Sharing of Inter-Provincial Transmission Line Leasing Fees" below.
Competition
Unicom operates, directly or through its subsidiaries, in the provinces, municipalities and autonomous region in which the Target Companies operate. The Chinese government encourage orderly and fair competition in the telecommunications industry in mainland China. Towards this end, it has extended certain favourable regulatory policies to Unicom in order to help it become a more viable competitor. In particular, the Chinese government has permitted Unicom to lower its mobile tariffs by up to 10% below the government guidance rates (or up to 20% below the government guidance rates in areas where TACS network service packages are offered that provide Local Access services, which packages have lower tariff rates than standard GSM tariff rates). As of 30 June 2000, Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and Guangxi Mobile had estimated market shares in their regions of 80.0%, 78.8%, 83.7%, 83.3%, 75.4%, 77.3% and 95.5%, respectively. The Target Companies are facing increasing competition from Unicom. However, given the relatively low cellular penetration rates in these geographical areas, the directors of the Company believe that there is substantial growth potential for mobile services in general in these markets. In addition, the directors of the Company believe that the Target Companies have significant competitive advantages in terms of the quality of their cellular networks, their financial resources, the experience and quality of their management and employees, their widely-recognized brand name and logo, their broad distribution networks and customer-focused services and their extensive range of value added services.
Employees
The following table sets forth information regarding employees of the Target Companies as of
30 June 2000.
| Beijing | Shanghai | Tianjin | Hebei | Liaoning | Shandong | Guangxi | |||||||
| Management | 392 | 278 | 265 | 506 | 549 | 789 | 221 | ||||||
| Technical and engineering | 437 | 643 | 334 | 700 | 1,569 | 1,023 | 539 | ||||||
| Sales and marketing | 398 | 1,277 | 417 | 1,816 | 1,066 | 1,898 | 585 | ||||||
| Financial and accounting | 77 | 42 | 56 | 76 | 139 | 275 | 104 | ||||||
| Others | 256 | 140 | 140 | 364 | 117 | 238 | 351 | ||||||
| Total | 1,560 | 2,380 | 1,212 | 3,462 | 3,440 | 4,223 | 1,800 |
Properties
The Target Companies own certain buildings and real properties, which are used for offices, administrative centers, retail outlets, base stations and other technical facilities, and other ancillary buildings. Chesterton Petty Limited, an independent valuer, has valued the interest of the Target Companies in these properties as of 30 June 2000 at approximately RMB4,680 million (equivalent to approximately HK$4,300 million). The Target Companies also collectively lease approximately 9,666 offices, administrative centers, retail outlets and technical facilities. In addition, the Target Companies lease from other subsidiaries of CMCC or otherwise have the right to use various properties for cell sites and switching equipment.
Financial Information
The following is a summary of the historical combined financial information of the Target Group as extracted from the audited financial statements for each of the three years ended 31 December 1999 and for the six-month period ended 30 June 2000, prepared in accordance with generally accepted accounting principles in Hong Kong ("HK GAAP"):
| Six months | |||||||||||||||||||||||||||||||||
| Year ended 31 December | ended 30 June | ||||||||||||||||||||||||||||||||
| 1997 | 1997 | 1998 | 1998 | 1999 | 1999 | 2000 | 2000 | ||||||||||||||||||||||||||
| RMB | HK$ | RMB | HK$ | RMB | HK$ | RMB | HK$ | ||||||||||||||||||||||||||
| million | million | million | million | million | million | million | million | ||||||||||||||||||||||||||
| Operating revenue (Turnover) | |||||||||||||||||||||||||||||||||
| Usage fees | 6,815 | 6,415 | 11,278 | 10,616 | 16,285 | 15,328 | 10,218 | 9,617 | |||||||||||||||||||||||||
| Monthly fees | 1,609 | 1,514 | 3,051 | 2,872 | 4,564 | 4,296 | 2,780 | 2,617 | |||||||||||||||||||||||||
| Connection fees | 3,277 | 3,085 | 2,793 | 2,629 | 2,113 | 1,989 | 548 | 516 | |||||||||||||||||||||||||
| Other operating revenue | 1,276 | 1,201 | 1,737 | 1,635 | 3,422 | 3,221 | 2,160 | 2,033 | |||||||||||||||||||||||||
| Total operating revenue | 12,977 | 12,215 | 18,859 | 17,752 | 26,384 | 24,834 | 15,706 | 14,783 | |||||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||
| Leased lines | 2,191 | 2,063 | 3,763 | 3,542 | 3,309 | 3,114 | 1,532 | 1,442 | |||||||||||||||||||||||||
| Interconnection | 1,850 | 1,741 | 2,753 | 2,591 | 4,867 | 4,581 | 2,749 | 2,587 | |||||||||||||||||||||||||
| Depreciation (1) | 1,822 | 1,714 | 3,073 | 2,893 | 4,793 | 4,512 | 2,652 | 2,496 | |||||||||||||||||||||||||
| Personnel | 276 | 260 | 415 | 391 | 546 | 514 | 326 | 307 | |||||||||||||||||||||||||
| Other operating expenses (2) | 2,054 | 1,933 | 3,404 | 3,204 | 4,349 | 4,094 | 2,697 | 2,539 | |||||||||||||||||||||||||
| Total operating expenses | 8,193 | 7,711 | 13,408 | 12,621 | 17,864 | 16,815 | 9,956 | 9,371 | |||||||||||||||||||||||||
| Profit from operations | 4,784 | 4,504 | 5,451 | 5,131 | 8,520 | 8,019 | 5,750 | 5,412 | |||||||||||||||||||||||||
| Write-down and write-off | |||||||||||||||||||||||||||||||||
| of TACS network | |||||||||||||||||||||||||||||||||
| equipment | - | - | - | - | (4,508) | (4,243) | - | - | |||||||||||||||||||||||||
| Other income/(expenses) | (86) | (81) | (115) | (109) | 9 | 8 | 50 | 47 | |||||||||||||||||||||||||
| Non-operating income/ | |||||||||||||||||||||||||||||||||
| (expenses) | 77 | 72 | 68 | 64 | 123 | 116 | 52 | 49 | |||||||||||||||||||||||||
| Finance costs | (123) | (116) | (181) | (170) | (638) | (601) | (396) | (373) | |||||||||||||||||||||||||
| Profit from ordinary | |||||||||||||||||||||||||||||||||
| activities before taxation | 4,652 | 4,379 | 5,223 | 4,916 | 3,506 | 3,299 | 5,456 | 5,135 | |||||||||||||||||||||||||
| Income tax | (316) | (297) | (640) | (602) | (824) | (776) | (1,002) | (943) | |||||||||||||||||||||||||
| Net profit (3) | 4,336 | 4,082 | 4,583 | 4,314 | 2,682 | 2,523 | 4,454 | 4,192 |
(1) Depreciation is calculated to write off the cost, or revalued amount where appropriate, of fixed assets on a straight-line basis over their estimated useful lives, to residual values, as follows:
| Depreciable Life | Residual Value | |
| Land use rights | Over the period of grant | - |
| Buildings | 8-35 years | 3% |
| Telecommunications transceivers, | ||
| switchingcentres, and other network equipment | 7 years | 3% |
| Office equipment, furniture and | ||
| fixtures and others | 4-18 years | 3% |
(2) Other operating expenses include provision for doubtful accounts which was approximately RMB469 million, RMB1,021 million, RMB971 million and RMB434 million for the year ended 31 December 1997, 1998 and 1999 and for the six-month period ended 30 June 2000, respectively.
(3) After excluding the write-down and write-off of TACS network equipment and the related tax effect, net profit for the year ended 31 December 1999 was RMB6,760 million.
(4) Solely for reference purposes, the results of the three years ended 31 December 1999 and the six months ended 30 June 2000 are translated from Renminbi into HK dollars at the rate of RMB1.062 = HK$1.00 prevailing on 30 June 2000.
The Target Group had a combined adjusted EBITDA of RMB6,520 million (equivalent to approximately HK$6,137 million), RMB8,409 million (equivalent to approximately HK$7,915 million) and RMB13,322 million (equivalent to approximately HK$12,539 million) for each of 1997, 1998 and 1999, respectively. Combined adjusted EBITDA for the Target Group for the six-month period ended 30 June 2000 was RMB8,452 million (equivalent to approximately HK$7,955 million). Adjusted EBITDA represents earnings before interest income, interest expense, income taxes, depreciation and amortisation, non-operating income (expenses) and write-down and write-off of fixed assets. While adjusted EBITDA is commonly used in the telecommunications industry worldwide as an indicator of operating performance, leverage and liquidity, it is not presented as a measure of performance in accordance with generally accepted accounting principles and should not be considered as representing net cash flows from operating activities.
The following is a summary of the combined net assets of the Target Group as extracted from the audited financial statements of the Target Group as at 30 June 2000 prepared in accordance with HK GAAP:
| As at 30 June 2000 | |||||
| RMB million | HK$ million | ||||
| Non-current assets | |||||
| Fixed assets | 37,252 | 35,064 | |||
| Construction in progress | 4,856 | 4,571 | |||
| Investment securities | 35 | 33 | |||
| Deferred tax assets | 451 | 424 | |||
| Current assets | |||||
| Inventories | 143 | 135 | |||
| Amounts due from CTC | 783 | 737 | |||
| Accounts receivable | 2,823 | 2,657 | |||
| Other receivables | 354 | 333 | |||
| Prepaid expenses and other current assets | 519 | 489 | |||
| Deposits with banks | 75 | 71 | |||
| Cash and cash equivalents | 6,467 | 6,087 | |||
| 11,164 | 10,509 | ||||
| Current liabilities | |||||
| Bank and other loans(1) | 3,727 | 3,508 | |||
| Current instalments of obligations under finance leases | 1,613 | 1,518 | |||
| Amounts due to ultimate holding company | 64 | 60 | |||
| Amounts due to CTC | 2,700 | 2,542 | |||
| Accounts payable | 2,788 | 2,624 | |||
| Accrued expenses and other payables | 2,508 | 2,361 | |||
| 13,400 | 12,613 | ||||
| Net current liabilities | (2,236) | (2,104) | |||
| Total assets less current liabilities | 40,358 | 37,988 | |||
| Non-current liabilities | |||||
| Bank and other loans(1) | (8,850) | (8,330) | |||
| Obligations under finance leases, excluding current | |||||
| instalments | (1,937) | (1,823) | |||
| Deferred revenue | (254) | (239) | |||
| Net assets | 29,317 | 27,596 |
(1) The Target Group's borrowings under current liabilities were used primarily to finance construction projects and generally consist of unsecured loans and are repayable in full on their respective due dates with interest rates ranging from 5.56% to 9.00% as at 30 June 2000. The Target Group's weighted average interest rate on short-term loans was 6.05% as at 30 June 2000. The interest rates for long-term loans as at 30 June 2000 ranged from 5.25% to 11.70%.
Additional detailed information regarding the Target Group's historical financial results will be set out in the Shareholders' circular to be issued by the Company.
Prospective Financial information
The Company and the Target Group believe that, on the bases and the assumptions to be disclosed in the shareholders' circular and in the absence of unforeseen circumstances, the combined revenue, the combined net profit and the combined adjusted EBITDA of the Target Group for the year ending 31 December 2000 is unlikely to be less than RMB33,400 million (equivalent to approximately HK$31,454 million), RMB8,300 million (equivalent to approximately HK$7,817 million), and RMB17,900 million (equivalent to approximately HK$16,857 million), respectively, under Hong Kong GAAP.
CONNECTED TRANSACTIONS
A number of transactions have been and will be entered into between (a) the Company, its subsidiaries and/or the Target Companies on the one hand; and (b) CMCC or its subsidiaries on the other, which will constitute connected transactions for the Company under the Listing Rules upon the completion of the Acquisition.
Certain charges for the services under these transactions are fixed according to tariffs set by the Chinese regulatory authorities. Those transactions where the charges are not set by Chinese regulatory authorities are based on commercial negotiation between the relevant parties, in each case on an arm's length basis. In this regard, the Company has the benefit of an undertaking from CMCC that to the extent within CMCC's control, the Company will be treated equally with any other cellular mobile communications operators in respect of all approvals, transactions and arrangements between the Company and CMCC and other cellular mobile communications operators controlled by CMCC. This forms an important basis of the connected transactions entered or proposed to be entered into by the Group.
Roaming Arrangements
Each of the Target Companies and the Group offer domestic and international roaming services to its subscribers. In May 2000, the Company entered into the Roaming Agreement with CMCC which applies to the six existing operating subsidiaries of the Company. This agreement is valid for two years from 1 April 1999, and will be automatically renewed on an annual basis unless either party notifies the other of its intention to terminate at least three months prior to the expiration of the term.
Under this agreement, with regard to inter-provincial roaming, 80% of the basic roaming calling charges payable by a roaming subscriber is credited to the visited network operator and the remaining 20% is retained by the roaming subscriber's home network operator.
With regard to international roaming, roaming calling charges incurred by an international cellular subscriber making or receiving a call while roaming in the areas in mainland China where the Group operates are collected and credited to the Group by CMCC, and the Group will make the necessary settlement with the relevant telecommunications operators in mainland China. CMCC also collects a 15% surcharge on the roaming calling charges from the international mobile communications operators and shares such surcharge equally with the Group. When the Group's subscribers roam internationally, the Group will collect the roaming calling charges together with a 15% surcharge from its subscribers and will pay the roaming calling charges together with half of the surcharge collected to CMCC, which will make the necessary settlement with the international mobile communications operators concerned.
In addition, CMCC provides inter-provincial and international roaming clearing and settlement services, including related data transmission services, to the Group. The Group pays to CMCC a roaming call record processing fee of RMB0.02 for each domestic roaming call record processed and RMB0.30 for each international roaming call record processed.
The Company has, subject to completion of the Acquisition and Independent Shareholders' approvals, entered into the Supplemental Agreement with CMCC in order that, among other things, this roaming arrangement with CMCC will apply to the Target Companies after the Acquisition.
Licensing of Trademark
CMCC is the owner of the "CHINA MOBILE" name and logo. CMCC has applied for registration of the "CHINA MOBILE" logo as a trademark in mainland China. In addition, applications have been filed in Hong Kong to register "CHINA MOBILE and logo" as the Group's trademark for certain goods and services. Pursuant to a non-exclusive licence agreement the Company entered into in October 1999 with CMCC, the Group has obtained the right to use the logo for a term of six years from 8 October 1999. No licence fee is payable for the period up to the third anniversary of the date when the registration of the logo in mainland China becomes effective. The parties can negotiate any fees payable after that period, provided that the fees cannot exceed the fees that CMCC charges its affiliates. CMCC may terminate the licence agreement if it no longer has any interest in the Company. The Company has, subject to completion of the Acquisition and Independent Shareholders' approvals, entered into the Supplemental Agreement with CMCC to, among other things, extend the arrangement under the existing licence agreement to the Target Companies after the Acquisition.
Spectrum Fees
The MII and the Ministry of Finance jointly determine the standardized spectrum fees payable to the MII by all mobile communications operators in mainland China, including the Group. Based on this standardized fee scale, CMCC determines the allocation of spectrum usage fees to be paid by each mobile communications operator under its control and the aggregate sum payable to the MII. In October 1999, the Company entered into an agreement with CMCC, under which the Group has been granted the exclusive right to use the frequency spectrum and telephone numbers allocated to the Group in the respective areas in which the Group operates. For the usage of the 800/900 MHz and 1800 MHz frequency bands, the charges will be shared between the Group's and CMCC's operating subsidiaries. 60% of the charges will be shared on the basis of the number of base stations at the end of the previous year and 40% of such charges will be shared on the basis of the bandwidth of the spectrum used. The agreement is valid for one year from 8 October 1999 and will be automatically renewed on an annual basis unless either party notifies the other of its intention to terminate at least three months prior to the expiration of the term. The Company has, subject to, among other things, completion of the Acquisition and Independent Shareholders' approvals, entered into the Supplemental Agreement with CMCC to, among other things, extend the arrangement under the existing agreement to the Target Companies after the Acquisition.
Sharing of Inter-Provincial Transmission Line Leasing Fees
In May 2000, the Company entered into an agreement with CMCC in relation to the leasing of inter-provincial transmission lines. This agreement is valid for two years from 1 April 1999 and will be automatically renewed on an annual basis unless either party notifies the other of its intention to terminate at least three months prior to the expiration of its term. The provisions relating to the inter-provincial transmission line leasing fee sharing arrangement applies to Fujian Mobile, Henan Mobile and Hainan Mobile from 1 April 1999, and to Guangdong Mobile, Zhejiang Mobile and Jiangsu Mobile from 1 October 1999. The inter-provincial transmission line leasing fees payable by the Group will be equal to the amount actually payable by CMCC to CTC, which amount is determined based on the standard leasing fee stipulated by the relevant authorities after adjusting for the discount entitled by the Company, on the basis that the cellular network operators at both ends of the transmission lines will share the transmission line leasing fees equally. The Company has, subject to completion of the Acquisition and and Independent Shareholders' approvals, entered into the Supplemental Agreement with CMCC in order that, among other things, the existing agreement will also apply to the Target Companies after the Acquisition.
Interconnection Arrangements
The cellular networks of each of the Target Companies and the Group interconnect with the fixed line network and cellular networks of CMCC in other regions. In May 2000, the Company entered into the Roaming Agreement with CMCC which applies to the six existing operating subsidiaries of the Company. This agreement is valid for two years from 1 April 1999 and will be automatically renewed on an annual basis unless either party notifies the other of its intention to terminate in writing at least three months prior to the expiration of the term. Under this agreement, with regard to inter-provincial roaming, when the roaming subscriber places a call from a roaming location, the operator of the visited network receives all long distance calling charges, if any, and when the roaming subscriber receives a call at a roaming location, the network operator with whom the subscriber is registered retains all long distance calling charges, if any.
International long distance calling charges incurred by an international cellular subscriber making an international long distance call while roaming in the areas in mainland China where the Group operates are collected by CMCC and are credited to the Group. The Group will make the necessary settlement with the relevant telecommunications operators in mainland China. CMCC also collects a 15% surcharge on such international long distance calling charges from the international mobile communications operators and shares such surcharge equally with the Group. When the Group's subscribers roam internationally, the Group will collect the international long distance calling charges, if any, together with a 15% surcharge from its subscribers and will pay the international long distance calling charges together with half of the surcharge collected to CMCC, which will make the necessary settlement with the international mobile communications operators concerned. The Company has, subject to completion of the Acquisition and Independent Shareholder's approvals, entered into the Supplemental Agreement with CMCC to, among other things, extend the existing arrangement to the Target Companies after the Acquisition.
Prepaid Services
Each of the Target Companies and the Group offer prepaid services. Some of such prepaid services, primarily the "Shenzhouxing" service, allow subscribers to add value to their SIM cards. The prepaid subscribers can make and receive local and domestic and international long distance calls and enjoy nationwide domestic roaming services. The prepaid subscribers may add value to their cards by purchasing value from any of the Group's network operators or CMCC's network operators. The Company has, subject to Independent Shareholder's approvals, entered into an agreement with CMCC regarding the sharing and settlement of revenue when prepaid subscribers purchase value from network operators other than their home network operators. This agreement will apply to the six existing operating subsidiaries of the Company and the Target Companies with retrospective effect from 1 July 2000 except that the sharing of revenue from prepaid subscribers purchasing value for their cards from network operators other than their home network operators commenced from 1 February 2000. The agreement is for a term of one year and will be automatically renewed on an annual basis unless either party notifies the other of its intention to terminate in writing at least three months prior to the expiration of the term. Under this agreement, the network operator in the location where the value is added remits 85% of the payment received to the subscriber's home network operator, and keeps the remainder as a handling charge. The arrangement for the sharing and settlement of interconnection and roaming revenue in relation to prepaid services is the same as the arrangement in relation to contract subscribers.
Property Leasing and Management Services
Each of the Target Companies leases and some of the Target Companies sub-lease from other subsidiaries of CMCC various properties for use as its business premises and offices and for locating equipment. In relation to leased properties, the rental payments are determined with reference to market rates. In relation to properties sub-leased to the Target Companies by such subsidiaries (which were in turn leased to such subsidiaries by third parties), the rental is equal to the rental payable by such subsidiaries to such third parties and such subsidiaries do not make any gains as the intermediate lessors. Some of such subsidiaries of CMCC also provide property management services in relation to the properties leased or sub-leased (other than for Tianjin Mobile and Guangxi Mobile). Property management fees are determined with reference to market rates.
The initial terms of such leases and sub-leases to Guangxi Mobile are renewable on an annual basis if Guangxi Mobile gives six months' notice of its intention to renew. Guangxi Mobile is entitled to terminate such leases and sub-leases by giving three months' notice at any time. The initial terms of such leases and sub-leases to Tianjin Mobile are automatically renewed on an annual basis unless terminated by Tianjin Mobile by three months' notice given at any time, or by the relevant lessor giving notice of its intention to terminate three months prior to the expiration of the relevant term. In relation to leases and sub-leases to Beijing Mobile, the relevant lease terms and (subject to the relevant head lease being valid or renewable for the extended term) sub-lease terms will be automatically renewed on an annual basis unless terminated by Beijing Mobile by three months' notice given at any time or the relevant lessor terminates by giving three months' notice prior to the expiration of the relevant term. In relation to other Target Companies, the relevant lease terms and (subject to the relevant head lease being valid or renewable for the extended term) sub-lease terms will be automatically renewed on an annual basis unless terminated by the relevant Target Company by giving three months' notice given at any time and, in relation to sub-leased properties, the relevant lessor may also terminate by giving three months' notice prior to the expiration of the relevant term. Beijing Mobile also leases certain properties and provides property management services to a subsidiary of CMCC on terms similar to those set out above. It is expected that Chesterton Petty Limited, an independent valuer, will confirm that the rentals payable under such lease and sub-leases are not more than market rates within each respective geographical area as at the relevant dates of such leases and the relevant head leases, and that all other terms of such leases and sub-leases are not onerous or unusual.
Construction and Related Services
Beijing Mobile, Shanghai Mobile, Liaoning Mobile and Shandong Mobile entered into agreements with certain subsidiaries of CMCC under which such subsidiaries provide services such as construction, design, equipment installation, testing and/or maintenance services and/or act as general contractors in relation to construction and other projects of the Target Companies. Such agreements are for terms of between six months and 16 months, each such term being automatically renewed on an annual basis unless either party (in the case of Shandong Mobile, Shanghai Mobile and Beijing Mobile) or Liaoning Mobile (in the case of Liaoning Mobile) notifies the other of its intention to terminate in writing at least three months prior to the expiration of the term. Beijing Mobile had also previously entered into other agreements for the provision of certain construction and related services which will continue to be performed according to their terms after the Acquisition. The charges payable for services rendered under such agreements are determined according to standards laid down by the relevant governmental departments and/or by reference to market rates.
Equipment Maintenance and Related Services
Beijing Mobile, Shanghai Mobile and Liaoning Mobile entered into agreements with certain subsidiaries of CMCC under which such subsidiaries provide equipment maintenance and related services to such Target Companies. Such agreements are for terms of between six months and 15 months, each such term being automatically renewed on an annual basis unless either party (in the case of Beijing Mobile) or Shanghai Mobile or Liaoning Mobile (in the case of Shanghai Mobile and Liaoning Mobile, respectively) notifies the other of its intention to terminate in writing at least three months prior to the expiration of the term. Beijing Mobile had previously also entered into another agreement for the provision of certain equipment maintenance services which will continue to be performed according to its terms after the Acquisition. The charges payable for services rendered under such agreements are determined according to standards laid down by the relevant governmental departments and/or by reference to market rates.
Transmission Tower Production, Sales and Other Services and Antenna Maintenance Services
Hebei Mobile entered into an agreement with a subsidiary of CMCC under which such subsidiary provides transmission tower design, production, installation and maintenance services and antenna maintenance services to Hebei Mobile, and sells transmission towers and spare parts to Hebei Mobile. The initial term of this agreement is for one year from 1 August 2000 to 31 July 2001. This agreement will be automatically renewed on an annual basis unless either party notifies the other of its intention to terminate in writing at least three months prior to the expiration of the term. The price of such transmission towers and spare parts and the charges payable for services rendered under the agreement are determined according to standards laid down by the relevant governmental departments and/or by reference to market rates.
The Connected Transactions described above constitute, or will upon completion of the Acquisition constitute, connected transactions under Chapter 14 of the Listing Rules. As the Connected Transactions are expected to occur on a regular and continuous basis in the ordinary and usual course of business, the Company has made an application to the Stock Exchange for a waiver from compliance with the normal approval and disclosure requirements related to connected transactions under the Listing Rules.
Pro Forma Impact on the Target Group's Results
Certain pro forma information for the year ended 31 December 1999 and the six-month period ended 30 June 2000 has been prepared based on the historical combined profit and loss account of the Target Group, after giving effect to the pro forma adjustments described below, as if the transactions and arrangements described became effective on 1 January 1999.
A pro forma combined balance sheet is not presented as the revaluation of the Target Group's fixed assets is fully reflected in the historical combined balance sheet as at 30 June 2000, and the pro forma adjustments described below do not affect such historical combined balance sheet.
The unaudited pro forma combined financial information of the Target Group does not purport to represent what the results of operations of the Target Group would actually have been if the events described below had in fact occurred at the beginning of 1999, or any other date, or to project the combined net profit of the Target Group for any future period. The adjustments are based on currently available information and certain estimates and assumptions. However, the management of the Company believes that these assumptions provide a reasonable basis for presenting the significant effects of the events as contemplated and that the pro forma adjustments give effect to those assumptions and are properly applied in the pro forma combined financial information.
The unaudited pro forma combined profit and loss account of the Target Group should be read in conjunction with the Accountants' Report and other financial information included in the Shareholders' circular.
Unaudited Pro Forma Combined Profit and Loss Account of the Target Group
For the six-month period ended 30 June 2000
| Target Group | Pro forma | Adjusted | Adjusted | |||||
| historical | adjustments | balance | balance | |||||
| RMB million | RMB million | RMB million | HK$ million | |||||
| Operating revenue | ||||||||
| Usage fees | 10,218 | 10,218 | 9,617 | |||||
| Monthly fees | 2,780 | 2,780 | 2,617 | |||||
| Connection fees | 548 | 548 | 516 | |||||
| Other operating revenue | 2,160 | 2,160 | 2,033 | |||||
| Total operating revenue | 15,706 | 15,706 | 14,783 | |||||
| Operating expenses | ||||||||
| Leased lines | 1,532 | 1,532 | 1,442 | |||||
| Interconnection | 2,749 | 2,749 | 2,587 | |||||
| Depreciation | 2,652 | 305(a | ) | 2,957 | 2,783 | |||
| Personnel | 326 | 326 | 307 | |||||
| Other operating expenses | 2,697 | 2,697 | 2,539 | |||||
| Total operating expenses | 9,956 | 10,261 | 9,658 | |||||
| Profit from operations | 5,750 | 5,445 | 5,125 | |||||
| Other income | 50 | 50 | 47 | |||||
| Non-operating income/(expenses) | 52 | 52 | 49 | |||||
| Finance costs | (396 | ) | (396 | ) | (373 | ) | ||
| Profit from ordinary activities | ||||||||
| before taxation | 5,456 | 5,151 | 4,848 | |||||
| 101(b | ) | |||||||
| Income tax | (1,002 | ) | (310)(c | ) | (1,211 | ) | (1,140 | ) |
| Net profit | 4,454 | 3,940 | 3,708 |
Unaudited Pro Forma Combined Profit and Loss Account of the Target Group
For the year ended 31 December 1999
| Target Group | Pro forma | Adjusted | Adjusted | |||||
| historical | adjustments | balance | balance | |||||
| RMB million | RMB million | RMB million | HK$ million | |||||
| Operating revenue | ||||||||
| Usage fees | 16,285 | 16,285 | 15,328 | |||||
| Monthly fees | 4,564 | 4,564 | 4,296 | |||||
| Connection fees | 2,113 | 2,113 | 1,989 | |||||
| Other operating revenue | 3,422 | 3,422 | 3,221 | |||||
| Total operating revenue | 26,384 | 26,384 | 24,834 | |||||
| Operating expenses | ||||||||
| Leased lines | 3,309 | 3,309 | 3,114 | |||||
| Interconnection | 4,867 | 4,867 | 4,581 | |||||
| Depreciation | 4,793 | 518(a | ) | 5,311 | 4,999 | |||
| Personnel | 546 | 546 | 514 | |||||
| Other operating expenses | 4,349 | 4,349 | 4,094 | |||||
| Total operating expenses | 17,864 | 18,382 | 17,302 | |||||
| Profit from operations | 8,520 | 8,002 | 7,532 | |||||
| Write-down and write-off of TACS | ||||||||
| network equipment | (4,508 | ) | (4,508 | ) | (4,243 | ) | ||
| Other income | 9 | 9 | 8 | |||||
| Non-operating income/(expenses) | 123 | 123 | 116 | |||||
| Finance costs | (638 | ) | (638 | ) | (601 | ) | ||
| Profit from ordinary activities | ||||||||
| before taxation | 3,506 | 2,988 | 2,812 | |||||
| 171(b | ) | |||||||
| Income tax | (824 | ) | (959)(c | ) | (1,612 | ) | (1,517 | ) |
| Net profit | 2,682 | 1,376 | 1,295 |
Description of Pro Forma Adjustments
(a) The Target Group's fixed assets were revalued as at 30 June 2000, resulting in a revaluation surplus recorded on such date. The adjustment records the additional depreciation resulting from the revaluation of the fixed assets as if the revaluation surplus had been recorded on 1 January 1999.
(b) The adjustment records the tax effect of the above pro forma adjustment.
(c) Previously, the connection fee revenue and certain surcharge revenue of the Target Group were not subject to enterprise income tax and, accordingly, no tax expense was included in the determination of the historical results of operations for the year ended 31 December 1999 and for the six-month period ended 30 June 2000. Upon the completion of the registration of the Target Companies as wholly foreign-owned enterprises, in accordance with the Ministry of Finance ruling, such revenue will be taxable at an enterprise income tax rate of 33%. The adjustment records the applicable additional tax expense as if such revenue was taxable since 1 January 1999.
Pro Forma Impact on the Group's Audited Results
In connection with the proposed Share Offering and Convertible Note Offering, the Group has prepared audited financial statements for the six months ended 30 June 2000 which will be included in the registration statement referred to in this announcement. The audited financial statements in respect of this period show a net profit of RMB8,724 million which is the same amount as is shown in the Group's unaudited interim report for the same period.
Assuming that the Acquisition had taken place on 1 January 1999, the pro forma effects on the total operating revenue, adjusted EBITDA, net profit and earnings per Share for the six-month period ended 30 June 2000 are set out below. In connection with Acquisition, the fixed assets of the Target Group were revalued as of 30 June 2000, and connection fee revenue and certain surcharge revenue, previously not taxable under PRC regulations, will become subject to enterprise income tax at a 33% rate when the Target Companies are registered as wholly foreign-owned enterprises. No adjustments have been made in respect of these arrangements of the Target Group. For illustrative purposes only, the following calculations are prepared assuming that the Company elects to increase the number of Consideration Shares issued to CMBVI to 19.7% of the enlarged issued share capital of the Company immediately after completion of the Share Offering and the issue of the Consideration Shares (assuming that the underwriters' over-allotment option in the Share Offering is not exercised and there is no conversion of the convertible notes to be issued under the proposed Convertible Note Offering) and the ADSs and/or Shares offered pursuant to the Share Offering and the Consideration Shares are issued at HK$51 per Share, being the closing price of the Shares on the Stock Exchange on 3 October 2000.
| For the six-month period ended | ||||
| 30 June 2000 | ||||
| Before Acquisition | Post Acquisition | |||
| (The Group) | (The Combined Group) | |||
| (RMB) | (HK$) | (RMB) | (HK$) | |
| Amounts in millions, except per share data | ||||
| Operating revenue | 28,897 | 27,200 | 44,603 | 41,983 |
| adjusted EBITDA | 16,817 | 15,829 | 25,269 | 23,785 |
| Net profit | 8,724 | 8,212 | 12,625 | 11,883 |
| Earnings per Share | 0.64 | 0.60 | 0.69 | 0.65 |
The pro forma net profit of the Combined Group for the six-month period ended 30 June 2000 has been prepared giving effect to the following:
(a) to adjust for the reduction in interest income of approximately RMB125 million (equivalent to approximately HK$118 million), calculated at a weighted average interest rate of 6.05% for the cash portion of the purchase consideration to be taken from the internal resources of the Company as if the transaction had taken place on 1 January 1999; and
(b) to record the interest expense of the convertible notes and the RMB bank loan of approximately RMB428 million (equivalent to approximately HK$403 million), calculated at interest rates of 3.8125% per annum (being the mid point of a range from 2.875% to 4.750%, which range is shown for illustrative purpose only, and is determined from recent market transactions) and 5.34% per annum (being the mid point of a range from 5.09% to 5.59%, which range is shown for illustrative purpose only), respectively, as if the issuance of convertible notes and the RMB bank loan borrowings were consummated on 1 January 1999.
Definitions
In this announcement, unless the context otherwise requires, the following expressions have the following meanings:
"Acquisition" the proposed acquisition by the Company of the entire issued share capital of the Target BVI Companies pursuant to the Acquisition Agreement
"Acquisition Agreement" the conditional sale and purchase agreement dated 4 October 2000 made between the Company, CMBVI and CMCC relating to the Acquisition
"adjusted EBITDA" earnings before interest income, interest expense, non-operating income (expenses), income tax, depreciation and amortisation and write-down and write-off of fixed assets
"ADSs" American depositary shares, each representing five Shares
"Beijing Mobile" Beijing Mobile Communication Company Limited, a wholly foreign-owned enterprise established under the laws of the PRC and wholly-owned by Beijing Mobile BVI
"Beijing Mobile BVI" Beijing Mobile (BVI) Limited, a company incorporated on 1 September 2000 in the British Virgin Islands
"China Mobile (Shenzhen)" China Mobile (Shenzhen) Limited, a wholly foreign-owned enterprise established under the laws of the PRC and wholly-owned by the Company
"CMBVI" China Mobile Hong Kong (BVI) Limited, a company incorporated in the British Virgin Islands and the immediate controlling shareholder of the Company
"CMCC" China Mobile Communications Corporation, a state-owned company established under the laws of the PRC
"CMHKG" China Mobile (Hong Kong) Group Limited, a company incorporated in Hong Kong and an indirect controlling shareholder of the Company
"Combined Group" the Company, its existing subsidiaries, the Target BVI Companies and the Target Companies
"Company" or "CMHK" China Mobile (Hong Kong) Limited, a company incorporated in Hong Kong whose Shares are listed on the Stock Exchange, whose ADSs are listed on the New York Stock Exchange and whose notes are listed on the Stock Exchange and the Luxembourg Stock Exchange
"Connected Transactions" the transactions entered into between (a) the Target Companies, the Company and/or its subsidiaries on the one hand and (b) CMCC or its subsidiaries on the other, as set out in the section headed "Connected Transactions"
"Consideration Shares" the new Shares proposed to be allotted and issued to CMBVI as part of the total purchase price of the Acquisition
"Convertible Note Offering" the proposed global offering of U.S. dollar-denominated convertible notes of the Company, as described in the section headed "The Proposed Share Offering, Convertible Note Offering and Bank Loans"
"CTC" China Telecommunications Corporation, a state-owned company established under the laws of the PRC
"Fujian Mobile" Fujian Mobile Communication Company Limited, a wholly foreign-owned enterprise established under the laws of the PRC and wholly-owned by Fujian Mobile BVI
"Fujian Mobile BVI" Fujian Mobile (BVI) Limited, a company incorporated on 1 September 1999 in the British Virgin Islands
"Group" the Company and its existing subsidiaries
"GSM" Global System for Mobile Communications, pan-European mobile telephone system operating in the 900 MHz frequency band based on digital transmission and cellular network architecture with roaming
"Guangdong Mobile" Guangdong Mobile Communication Company Limited, a wholly foreign-owned enterprise established under the laws of the PRC and a wholly-owned subsidiary of the Company
"Guangxi Mobile" Guangxi Mobile Communication Company Limited, a wholly foreign-owned enterprise established under the laws of the PRC and wholly-owned by Guangxi Mobile BVI
"Guangxi Mobile BVI" Guangxi Mobile (BVI) Limited, a company incorporated on 1 September 2000 in the British Virgin Islands
"Hainan Mobile" Hainan Mobile Communication Company Limited, a wholly foreign-owned enterprise established under the laws of the PRC and wholly-owned by Hainan Mobile BVI
"Hainan Mobile BVI" Hainan Mobile (BVI) Limited, a company incorporated on 1 September 1999 in the British Virgin Islands
"Hebei Mobile" Hebei Mobile Communication Company Limited, a wholly foreign-owned enterprise established under the laws of the PRC and wholly-owned by Hebei Mobile BVI
"Hebei Mobile BVI" Hebei Mobile (BVI) Limited, a company incorporated on 1 September 2000 in the British Virgin Islands
"Henan Mobile" Henan Mobile Communication Company Limited, a wholly foreign-owned enterprise established under the laws of the PRC and wholly-owned by Henan Mobile BVI
"Henan Mobile BVI" Henan Mobile (BVI) Limited, a company incorporated on 1 September 1999 in the British Virgin Islands
"Hong Kong" Hong Kong Special Administrative Region of the People's Republic of China
"HK$" Hong Kong dollars, the lawful currency of Hong Kong
"Independent Board Committee" the committee of directors of the Company, consisting of Arthur Li Kwok Cheung, an independent non-executive director of the Company, formed to advise the Independent Shareholders in respect of the terms of the Acquisition, the mechanism for the determination of the issue price of the Consideration Shares and the terms of the Connected Transactions
"Independent Shareholders" Shareholders other than CMBVI and its associates (as defined under the Listing Rules)
"Jiangsu Mobile" Jiangsu Mobile Communication Company Limited, a wholly foreign-owned enterprise established under the laws of the PRC and a wholly-owned subsidiary of Jiangsu Mobile BVI
"Jiangsu Mobile BVI" Jiangsu Mobile (BVI) Limited, a company incorporated on 6 March 1998 in the British Virgin Islands
"Liaoning Mobile" Liaoning Mobile Communication Company Limited, a wholly foreign-owned enterprise established under the laws of the PRC and wholly-owned by Liaoning Mobile BVI
"Liaoning Mobile BVI" Liaoning Mobile (BVI) Limited, a company incorporated on 1 September 2000 in the British Virgin Islands
"Listing Rules" the Rules Governing the Listing of Securities on the Stock Exchange
"mainland China" China (excluding Hong Kong, Macau and Taiwan)
"MII" the Ministry of Information Industry of the PRC, or where the context so requires, its predecessor, the former Ministry of Posts and Telecommunications
"PRC" or "China" the People's Republic of China
"Prospectus" the final prospectus to be issued by the Company in relation to the Share Offering and the Convertible Note Offering in the United States of America
"RMB" Renminbi, the lawful currency of mainland China
"Roaming Agreement" the inter-provincial interconnection and domestic and international roaming settlement agreement dated 5 May 2000 between the Company and CMCC
"Shandong Mobile" Shandong Mobile Communication Company Limited, a wholly foreign-owned enterprise established under the laws of the PRC and wholly-owned by Shandong Mobile BVI
"Shandong Mobile BVI" Shandong Mobile (BVI) Limited, a company incorporated on 1 September 2000 in the British Virgin Islands
"Shanghai Mobile" Shanghai Mobile Communication Company Limited, a wholly foreign-owned enterprise established under the laws of the PRC and wholly-owned by Shanghai Mobile BVI
"Shanghai Mobile BVI" Shanghai Mobile (BVI) Limited, a company incorporated on 1 September 2000 in the British Virgin Islands
"Share(s)" ordinary share(s) of HK$0.10 each in the capital of the Company
"Shareholders" holders of Shares
"Share Offering" the proposed global offering of Shares and American depositary shares of the Company, as described in the section headed "The Proposed Share Offering, Convertible Note Offering and Bank Loans"
"Stock Exchange" The Stock Exchange of Hong Kong Limited
"Strategic Investor the strategic investor placing agreement dated 4 October
Placing Agreement" 2000 between, inter alia, the Company and Vodafone setting out the terms and conditions of the Strategic Placing
"Strategic Placing" the purchase of Shares by Vodafone as part of the Share Offering and as described in the section headed "Proposed Strategic Alliance with Vodafone"
"Supplemental Agreement" the supplemental agreement dated 19 September 2000 between the Company, CMCC and the Target Companies pursuant to which certain existing arrangements relating to interconnection and roaming, trademark licensing, spectrum and number resources usage and sharing of inter-provincial transmission leased line fees were extended to the Target Companies
"TACS" Total Access Communication Systems, a European standard for analog mobile telephone transmissions in the 800 and 900 MHz frequency bands
"Target BVI Companies" Beijing Mobile BVI, Shanghai Mobile BVI, Tianjin Mobile BVI, Hebei Mobile BVI, Liaoning Mobile BVI, Shandong Mobile BVI and Guangxi Mobile BVI
"Target Companies" Beijing Mobile, Shanghai Mobile, Tianjin Mobile, Hebei Mobile, Liaoning Mobile, Shandong Mobile and Guangxi Mobile
"Target Group" the group of companies comprising the Target Companies
"Tianjin Mobile" Tianjin Mobile Communication Company Limited, a wholly foreign-owned enterprise established under the laws of the PRC and wholly-owned by Tianjin Mobile BVI
"Tianjin Mobile BVI" Tianjin Mobile (BVI) Limited, a company incorporated on 1 September 2000 in the British Virgin Islands
"Unicom" China United Telecommunications Corporation, a state-owned enterprise established under the laws of the PRC
"U.S. dollars" or "US$" United States dollars, the lawful currency of the United States of America
"Vodafone" Vodafone Group Plc.
"Zhejiang Mobile" Zhejiang Mobile Communication Company Limited, a wholly foreign-owned enterprise established under the laws of the PRC and a wholly-owned subsidiary of the Company
For your convenience, this announcement contains translations between Renminbi amounts and U.S. dollars at RMB8.2782 = US$1.00, between Renminbi amounts and Hong Kong dollars at RMB1.062 = HK$1.00, and between Hong Kong dollar amounts and U.S. dollars at HK$7.7960 = US$1.00, the prevailing rates on 30 June 2000. The translations are not representations that the Renminbi and Hong Kong dollar amounts could actually be converted into U.S. dollars or Hong Kong dollars at those rates, if at all.
FURTHER INFORMATION
CMBVI currently owns approximately 75% of the issued share capital of the Company and the total purchase price for the Acquisition is approximately 476% of the net asset value of the Group for the financial year ended 31 December 1999. Accordingly, under the Listing Rules, the Acquisition constitutes both a very substantial acquisition and a connected transaction for the Company.
CMBVI (and its associates), being a connected person of the Company, will abstain from voting its shares on the ordinary resolutions to approve the Acquisition, the issue of the Consideration Shares and the Connected Transactions. CMBVI (and its associates) will, however, be entitled to vote in relation to the ordinary resolution to approve the proposed increase in the authorised share capital of the Company.
A circular containing, among other things, details of the terms of the Acquisition, the issue of the Consideration Shares and the Connected Transactions, letters from the Independent Board Committee and from Rothschild as independent financial adviser to the Independent Board Committee, further financial information of the Target Companies, extracts from the preliminary prospectus for the proposed Share Offering and Convertible Note Offering and a notice to the Shareholders convening an extraordinary general meeting to approve the terms of the Acquisition, the increase in authorised share capital of the Company, the issue of the Consideration Shares and the Connected Transactions, will be despatched to the Shareholders and, for information only, noteholders of the Company as soon as practicable.
The Board notes the increase in the price of the Shares today and confirms that, save as disclosed above, there are no negotiations or agreements relating to intended acquisitions or realisations which are discloseable under paragraph 3 of the Listing Agreement, neither is the Board aware of any matter discloseable under the general obligation imposed by paragraph 2 of the Listing Agreement, which is or may be of a price-sensitive nature.
By Order of the Board
China Mobile (Hong Kong) Limited
Wang Xiaochu
Chairman
Hong Kong, 4 October 2000
The directors of the Company collectively and individually accept full responsibility for the accuracy of the information contained in this announcement and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, opinions expressed herein have been arrived at after due and careful consideration and there are no other facts the omission of which would make any statement herein misleading.
Please also refer to the published version of this announcement in the South China Morning Porst and Hong Kong Economic Times.