Bottom line: Unicom's choice of 14 partners for a mixed-ownership reform plan involving its Shanghai-listed unit is far too many, and is ultimately likely to fail when those partners become frustrated and sell their shares.

What I feared might happen has come to pass in a mixed-ownership reform plan being crafted by China Unicom (HKEx: 762; NYSE: CHU), one of the nation's three telcos that is experimenting with selling some of itself to private investors. That's a reference to reports in early August that the company might be planning to take on as many as 20 partners in the plan to sell a significant stake in its Shanghai-listed unit, China United Network Communications (Shanghai: 600050), to strategic private investors.

My worry was that taking on so many partners would effectively dilute the plan, since none of the partners would receive a very big stake and Unicom's attention would be too fragmented. As it turns out, the number 20 was a bit too high, but not far off the mark. That's the latest word, as Unicom has finally announced its mixed-ownership reform plan that will see it partner with 14 private companies in a bid to become more dynamic.

The list of partners looks quite impressive, and includes all four of China's largest Internet companies, namely Alibaba (NYSE: BABA), Tencent (HKEx: 700), JD.com (Nasdaq: JD) and Baidu (Nasdaq: BIDU). (English article) It also includes some other major corporate names, such as retailing giant Suning (Shenzhen: 002024), ride-hailing startup Didi Chuxing, and leading insurance company China Life (HKEx: 2628; Shanghai: 601628).

Under the highly anticipated plan, the 14 investors will collectively pay about 75.5 billion yuan ($11.1 billion) for 35 percent of China United Network Communications. Unicom's state-owned parent will continue to be the biggest single stakeholder with about 37 percent of the Shanghai-listed company's shares. But control really shouldn't be an issue in this case, since the 35 percent being sold, divided by 14 new shareholders, would mean that each of those would only get a little more than 2 percent of the company.

Longtime readers will know that I've never been a big fan of Unicom, which seems to be a perpetual laggard regardless of who is leading the company. Inept management at many levels seems to be the company's biggest problem, and that appears to be the case once again here.

No sooner did the company release its long-awaited plan, then it released a series of confused and unclear statements saying the plan it had announced wasn't quite right. It appears that Unicom may have violated some stock exchange rules about the amount of new shares its Shanghai-listed company could issue, and at least one of the 14 partners it named later said it wasn't part of the plan.

Par for the Course

Such confusion seems to be par for the course for this company, though I doubt we will see any major new changes when a final plan comes out. One of my sources told me Unicom was coming under pressure to announce the plan after numerous media leaks, and may have moved too quickly in a bid to make the big announcement at the same time it released its mid-year financial results.

Regardless of the specifics, my earlier thesis that taking on so many new partners will ultimately undermine this plan still holds true, regardless of whether that's 20 partners, 14 or even 13. In this case Unicom looks like it's trying to bring on as many "famous names" as possible, perhaps with the hope that if it invites enough big players to partner that at least one or two will succeed.

Perhaps that's the case, but I personally think the big Internet companies and other new partners will have less incentive to make these new partnerships work since they know their rivals are also working with Unicom. And 2 percent ownership is hardly very much, since many institutional buyers routinely purchase such stakes in big state-owned enterprises through open market buying.

Unicom itself has sold larger stakes to such strategic buyers in the past, most notably as much as 10 percent of its Hong Kong-listed unit to Spain's Telefonica (Madrid: TELF) around a decade ago. Historians will know that nothing ever came of that strategic tie-up, and Telefonica has now sold off most of that stake. (previous post) I expect that most or all of these other new partners will end up following Telefonica's lead, and this latest experiment to breathe new life into Unicom with private-sector partners will ultimately prove a big dud.