China's minor telecom campany China Netcom is selling its fixed-line business in Shanghai and Guangdong, to its parent company. According to a a recent statement, China Netcom's parent company China Network Communications Group will pay 3.5 billion yuan ($450 million) for the former's fixed-line business in the two Chinese cities.

China Network Communications Group will pay an initial amount of 1.05 billion yuan in cash on the first business day following the completion of the deal, and will pay the remaining amount in cash within 30 days. The deal is expected to be closed by the end of February 2007, subject to approval by independent shareholders and Chinese government authorities.

China Netcom CEO Zuo Xunsheng said the decision to sell off the company's fixed-line business hinged on several factors, including the quality of the assets being sold, the growth prospects of these assets, earnings potential and competitive advantages in their respective markets, as well as other financial and operational indicators.  "China Netcom has extensive network resources and higher profitability in the northern service region. After the sale of the Guangdong and Shanghai assets, we will be well-positioned to concentrate our resources in the northern service region" said Company chairman Zhang Chunjiang. He added that the company will maintain its fixed-line business in this part of the country.

In a research note by Credit Suisse Group released earlier this month, analysts Jeffrey Tan and Terry Chan pointed out that there are 47 million fixed-line subscribers in Shanghai and Guangdong. With a 95 percent market share, China Telecom dominates the fixed-line markets of these two Chinese cities, according to the analysts.

The decision by China Netcom to sell off its fixed-line assets may be seen as a move by the operator to consolidate its business and make preparations to support upcoming 3G services. The Chinese government has said it would issue 3G licenses later this year in the run-up to the Beijing Olympics in 2008.

According to estimates by Analysts, a 3G network that supports 10 million subscribers could cost up to 20 billion yuan in China. The analyst company noted that China Netcom's recent cash in hand was insufficient for it to compete with the other two giant rivals for a fair share of the big 3G cake. The trimming of its fixed-line load may be a real solution to its funding problem in the 3G license bidding.