HONG KONG: Li commits to PCCW after sale blocked

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HONG KONG: Li commits to PCCW after sale blocked
Chairman says he will work with China Netcom; Broadcasting Authority will investigate possible breach of ownership rules

South China Morning Post
Friday, December 1, 2006

By Frederick Yeung


Richard Li Tzar-kai said last night he remained committed to PCCW following a vote in Singapore that torpedoed his plans to sell his controlling stake in the telecoms giant.

The PCCW chairman said he would continue to work with the China Network Communications Group (Netcom), which owns a 20 per cent stake in PCCW and had earlier opposed a sale of Mr Li's stake to foreign firms, to explore opportunities for the company.

"I have considered very carefully what is in the best interests of the company going forward. In the past six months we have explored a number of options to create shareholder value which, together with Netcom, I will continue to explore," Mr Li said.

"I remain as committed as ever to PCCW...and I intend to remain a major shareholder."

Mr Li's assurances came after minority shareholders of PCCW's parent, Singapore-listed Pacific Century Regional Developments, vetoed the sale of his 23.6 per cent stake to a consortium led by investment banker Francis Leung Pak-to.

"There are no discussions with any party concerning a possible sale of shares in the company in progress," PCCW said in a statement last night.

PCCW, Hong Kong's largest telephone company, was also not in negotiations with any third party concerning the possible sale of its telecoms and media-related assets, the board said.

The company would "continue to pursue innovative business strategies and market opportunities...under the continued chairmanship of Mr Li".

The statement indirectly denied a market rumour that China Network might seek to buy out Mr Li if the deal was voted down by PCRD's minority shareholders.

The damage to relationships that might have been caused by Mr Li's attempts over the past five months to divest himself of PCCW needed to be repaired, a source familiar with the situation said.

"Mr Li should make efforts to rebuild relationships with parties involved in the deal, such as China Network, and he should commit to this," the source said.

PCCW directors "all showed their confidence and support for Mr Li" at a meeting on Wednesday, the source said.

Mr Li said he appreciated the efforts Mr Leung had made in the process of the transaction.

The deal was opposed by PCRD's minority shareholders, with 76.3 per cent, holding 366 million shares, voting against the sale, while 23.7 per cent, holding 113 million shares, supported the sale.

Shareholders attending yesterday's meeting said PCCW should not be sold at such a low price.

Mr Leung offered HK$6 per PCCW share, making the deal worth HK$9.2 billion. Supporting the bid, he lined up Li Ka-shing foundations in Hong Kong and Canada to take a 12 per cent interest in PCCW and Spanish telecoms firm Telefonica to buy 8 per cent.

"PCCW should be a goose that can lay golden eggs. It is PCRD's best asset and we shouldn't sell it for such a low price," one shareholder said after the vote.

Mr Li said he accepted their decision. "PCRD minority shareholders have spoken and the PCRD board respects their decision."

China Network, which would have assumed Mr Li's position as the single largest shareholder of PCCW if the deal had gone through, declined to comment on the results of the vote.

China Network might still want to boost its stake in PCCW by buying either in the open market or from other institutional investors, market sources said.

Shareholders hoping for a better offer may be disappointed, according to broker Merrill Lynch.

"As not all bidders will have Beijing's blessing, Beijing has taken the stance that a change of control of the PCCW assets is a one-country issue, but not a two-systems issue," Merrill Lynch said last night in a research report.

Mr Leung said the rejection of his bid should mark the end of the proposed sale to his consortium. He blamed the media for scuppering the deal.

"It is perhaps unfortunate that certain recent media reports and speculation have caused confusion amongst minority shareholders as to the rationale and overwhelming benefits of the transaction," Mr Leung said in a statement.

Local newspapers reported last week that Mr Li, who had to abstain from voting on the sale, wanted PCRD's minority shareholders to vote it down as he did not want PCCW to be involved in a political and murky transaction. PCRD's independent directors had previously called for a vote in favour of the deal.

Questions about the future of China Network's relationship with PCCW sparked political concerns, particularly the possibility that the Hong Kong business would be merged with the mainland fixed-line carrier's operations if the sale went ahead.

Li defeat dims PCCW China outlook

By Tim Leemaster and Lee Yuk-Kei

PCCW's prospects in the high-growth mainland market and the outlook for its share price are dim after minority shareholders blocked chairman Richard Li Tzar-kai's plan to sell his stake, fund managers and analysts said.

Such an expectation comes because the company is still headed by Mr Li, whose attempt to sell his stake reflects that he does not want to run the company, they said.

At the same time, they said PCCW's second-largest shareholder China Netcom Group, caught off guard by Mr Li's sell-off plans, considers him an unwelcome partner.

"It's a real stalemate situation," said one hedge fund manager who recently sold down his stake in the company. "Had the deal gone through, you would have had Francis Leung Pak-to go in there and repair bridges with the Chinese and then there would be some upside."

Minority shareholders of Pacific Century Regional Developments, a Singapore-listed firm controlled by Mr Li, spurned an offer yesterday from former banker Mr Leung, two charities owned by Mr Li's father Li Ka-shing and Spanish company Telefonica to buy a 22.7 per cent stake in PCCW for HK$9.2 billion.

"Shareholders should be very disappointed at the result," said Auyeung Tat, a fund manager at Apex Capital. "The situation becomes murky again ... in the short term, PCCW shares will be under pressure."

The shares have plunged 95 per cent since it bought control of Cable & Wireless HKT in 2000 to become Hong Kong's dominant telecommunications service operator.

Kenny Tang Sing-hing, an associate director of Tung Tai Securities, said the shares of PCCW will be under heavy selling pressure as shareholders will not get the special dividend that Richard Li promised if the deal was approved.

Many market observers expect a period of quiet after the number of iterations the deal has seen since it all started earlier this year.

US buyout firm TPG-Newbridge and Macquarie Bank failed in their bids to buy PCCW assets after Beijing objected to them falling into foreign hands. The two suitors would not comment.

Local tycoons appear to be uninterested as none, apart from the elder Mr Li, joined Mr Leung's consortium. That leaves Netcom and other mainland firms likely buyers.

"Everyone needs a period of stability where they can just focus on the business," said one fund manager who asked not to be identified. "It's been deals and deals and now they have to turn back and focus on the business and let management get back to management."

However, any quiet will not last long as the company is likely to remain the object of acquisitional interest despite Beijing's sentiments to the contrary.

Everyone agrees that PCCW has a lot going for it, particularly the Now Broadband television unit which has attracted a growing number of subscribers and has recently won the exclusive right to broadcast English Premier League football.

PCCW, with more than 700,000 subscribers, has the most broadband television subscribers of any service provider in the world.

"PCCW has the management and technical experience that could make it a bid target again with interested bidders including telecoms operators and private equity, especially if recent management disputes escalate and the stock takes a hit," said Cyrus Mewawalla, an analyst at broker Westhall Capital.

PCCW tumbles 4.95pc

Shares in Hong Kong’s dominant telecom firm PCCW tumbled 4.95 per cent on Friday amid disappointment at shareholders’ rejection of the controversial sale of the company, dealers said.

Minority shareholders in Singapore-listed Pacific Century Regional Developments on Thursday voted down the sale of PCCW chairman Richard Li Tzar-kai’s 23 per cent controlling stake to a consortium led by financier Francis Leung Pak-to.

Mr Leung, a close associate of Richard Li’s father, Asia’s richest man Li Ka-shing, led a ground which included the elder Mr Li’s charitable foundations and Spanish telecom giant Telefonica.

PCCW shares closed 25 cents lower at HK$4.80, just off the intraday low of HK$4.79, while the benchmark Hang Seng Index declined 269.66 points or 1.42 per cent to 18,690.82.

Dealers said PCCW’s future remained uncertain. Richard Li said he remained committed to the company but shareholders and investors were concerned as to whether or not he would ever try to sell his controlling stake again.

“Shareholder disappointment with [the vote] ... was exacerbated by their concerns over the uncertain growth prospects [for PCCW] under chairman Richard Li,” said YK Chan, strategist at Phillip Asset Management.

In July, Mr Leung stepped in to buy Richard Li’s stake for HK$9.2 billion after central government-controlled China Netcom, which holds a 20 per cent stake, insisted that strategic telecom assets should not be sold to foreign investors.

This squashed previous offers of US$7 billion (HK$54.6 billion) from Australia’s Macquarie Bank and the Texas Pacific Group from the United States for PCCW’s key telecoms and media assets.

On Thursday, the PCCW board said it was not in negotiations with any third party concerning the possible sale of its key assets. Richard Li said he would continue to work with China Netcom and explore opportunities for the business.

The controversial deal had worried analysts in Hong Kong given Beijing’s intervention to stop the initial sale and sparked concerns over corporate governance standards.

Investment house JP Morgan said it expected “increased risks on the horizon” as a result of Richard Li’s unsuccessful attempt to exit the company.

“We believe PCCW’s prospects of gaining a foothold in the mainland telecom market is at risk, along with its future strategic direction due to the tenuous relationship between the company’s two largest shareholders,” referring to China Netcom and Richard Li.

The rejection, coupled with PCCW’s earlier decision to buy broadcast rights for England Premier League (EPL) football, would impact the company’s earnings, it said.

“EPL will be a drag on profitability over the next two years and ownership and corporate governance overhangs remain. This may see the stock trading at levels below what we would regard as fair value,” it added.

Regulator checks for media rule breach

By Frederck Yeung

As his attempt to sell a stake in PCCW has failed, Richard Li Tzar-kai now faces a possible breach of local media ownership rules with his 50 per cent stake in Hong Kong Economic Journal.

The Broadcasting Authority, the media regulator in Hong Kong, said it is seeking more information from PCCW, the second largest pay-television operator, to see if the rule banning cross-media ownership has been breached.

The authority's rule states that anyone who controls one media organisation is barred from owning 15 per cent or more of another.

Mr Li indirectly owns 23 per cent of PCCW through Pacific Century Regional Developments. He also personally owns 3 per cent of PCCW, making him the largest shareholder in the company.

The problem would have been solved had PCRD minority shareholders approved the sale of the PCCW stake to a consortium led by former investment banker Francis Leung Pak-to.

The proposal was voted down yesterday. Mr Li, who owns 75 per cent of PCRD, could not vote after it was revealed his father Li Ka-shing was a member of the consortium.

Mr Li could get a waiver allowing him to control more than one media group but a Broadcasting Authority spokesman said it has not received an application from him.

Democratic Party lawmaker Sin Chung-kai said the government is unlikely to let Mr Li control PCCW and the Journal at the same time.

"Mr Li had spoken to the public on how he would like to operate the Journal when the transaction closed in August. Mr Li and PCCW are clearly breaching the cross-media ownership rule," Mr Sin said.

A source familiar with the situation said technically Mr Li has not broken the rule, as he invested in the Journal through a trust firm.

In August, Mr Li struck a deal with Journal founder Lam Shan-muk and columnist Cho Chi-ming to take 50 per cent of the Journal for HK$280 million.

The purchase was made through a trust company called Clermont Media of which Mr Li is a settlor.

"We noticed the sensitive of cross-media ownership issue from the first day we negotiated with Mr Lam," said a source familiar with the situation.

He added Mr Lam would not have sold his stake to Mr Li had they not been confident cross-media ownership was not a problem.

"Technically speaking, the trust set up by Mr Li could be treated as an independent body from PCCW or Mr Li himself," the source said.

Mr Li may also get the so-called "firewall treatment" from the government as in the case of Television Broadcasts, a free-to-air broadcaster that owns 49 per cent of a pay-television operator, the source said.

Date Posted: 12/1/2006