ChinaTel acquires 51% of new 34,000km fiber optic cable venture
Telecommunications operator ChinaTel Group (OTCBB: CHTL) has agreed to invest a total of $20.5 million in Shanghai Ying Yue Network Technology and Azur Capital, in a new joint venture that will see ChinaTel acquire 51% of 34,000 km of fiber optic cable in China, which connects all major poplulation centres within the country.
The business model of the new venture company will be to upgrade the fiber and charge tariffs to telecommunications operators, as more and more demand increased data transmission capacity as networks transfer to 4G platforms.
Under the terms of the transaction, ChinaTel is investing nine million shares of its Series A common stock and financing $7 million towards equipment and services, sufficient to upgrade the first 9,000 km of the fiber for transmission of data to a 100GB standard, it said. The total value of all parties' capital contributions is $40.5 million.
ChinaTel will use the fiber for its own wireless broadband projects, and any excess capacity will be sold by the venture to other operators.
"This acquisition will allow ChinaTel to control its own destiny as to all its current and future broadband operations in China," said ChinaTel's CEO George Alvarez.
"ChinaTel has not only secured control over one of the major costs of the networks it will operate as a joint venture partner, but has also created a revenue source that is independent of those relationships."
The deal was structured to allow ChinaTel to report the results of the venture's operations on ChinaTel's consolidated financial statements in the same way as its other subsidiaries.
After the acquisition closes, ChinaTel will own 51% of a Cayman Islands-based parent company and the China-based subsidiary, which will be a foreign-owned enterprise contractually entitled to 100% of the net profits of the venture.
ChinaTel said it expects to recoup the value of its investment through the redemption of preferred shares the Cayman Islands-based parent company will issue.
The company anticipates awarding the equipment contract for the first 9,000 km of the fiber to ZTE Corp, who will finance 85% of the equipment under the two companies' partnership.
The cost to upgrade the remainder of the 34,000 km of backbone fiber is expected to be paid for out of transport fee revenues from the first 9,000 km.
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