Quamnet - PCCW's (8) Yuen Declines to Comment
Jan 12, 2001 - 13:52:09 HKT
Quam Research
No money, no backbone. That's the message from PCCW today.
Press reports have PCCW deputy boss Francis Yuen saying that no new Internet Protocol (IP) backbone projects will be pursued. Their global underwater fiber optic project has been suspended until the company is able to get more money.
Financing Troubles
There has been recent news of PCCW's refinancing efforts for the substantial chunk of debt they picked up in order to storm the gates and take over HK Telecom. The company did not want to stop there, but had ambitious plans to go regional in mobile phone operations and in undersea cable (IP backbone etc). However, PCCW needed to first ensure that its creditors were happy since the company would be tapping those same sources for more money later. Richard Li's tech start-up thus had to make sure it could pay down a large portion of the original debt and refinance the rest. "No problem!" they must have been thinking since the Li brand combined with the dotcom feeding frenzy would surely mean banks would treat them with kid gloves.
Not so. Banks are reluctant to lend at the rates PCCW was demanding, and PCCW has since had to give in and pay more. The Fed rates decrease helps a bit but this was mostly offset by a higher percentage above LIBOR that PCCW agreed to pay on its remaining US$4.7 billion debt.
PCCW and partner Telstra had hoped to finance the IP backbone project with another US$2 billion in debt, but that was scaled back by a quarter to US$1.5 billion as banks responded with less than the appropriate degree of enthusiasm. This is presumably on hold now, at least until they can find lenders and terms that won't break them. PCCW says the current underwater cable network has some US$1.8 billion in sales, should hit US$1.9 billion this year but will generate around US$4.5 billion in another 6 years. That type of growth is reminiscent of Internet math.
Exactly how PCCW is doing right now is not something the firm likes to disclose. According to the SCMP, Mr. Yuen "declined to comment how much it will pay in interest expenses this year ... (and he also) declined to comment on how much cash the company would have after the US$4.7 billion refinancing."
Internet Icarus
PCCW has been a less than impressive stock as the hype that supported its high valuations is now almost entirely deflated. The company is also having to realize that they actually need to run a business and worry about issues such as cash flow, profitability, and customers. This new enlightenment has led to the company's decision to raise local fixed-line telecom rates, but now they are faced with an angry public who would very much like to switch providers. It is almost ironic that the only thing that is protecting PCCW's key cash cow from mass customer defection is the very thing that nimble, start-up entrepreneurs usually fight against and try to break up: an established monopoly position.
The fixed-line coverage by its competitors is miniscule, and the competitors also accuse PCCW's HKT business of putting barriers up instead of cooperating fully as they were supposed to in the market's deregulation.
Traders were reported yesterday as saying that people were selling the stock because they feared that Cable & Wireless would sell what it could when the next lock-up period ends in February. Words like "looming" were used, but there are still about six weeks left before C&W is free to dump half its remaining stake. That C&W's obvious desire to cash out as soon and as much as possible provides pressure on the stock is not new. Yesterday's stock decline, however, had to do with more than just C&W's relatively imminent, predictable action: PCCW is in trouble.
Management has not been able to pull off what they designed. From the start, it was obvious that debt which was a significant challenge if they were to carry out their invasion plans. They were dependent on a high-flying tech market rather than intelligent long-term strategies.
Some investors believed in Mr. Richard Li and his vision and have been hurt. A number of small investors in the former HKT held the stock for dividends -- Mr. Li virtually promised them that the stock would be a high flyer and so would more than make up for their dividend loss, but that has not happened, and it was a dangerous comment from the beginning. There are more than a few reasons why shareholders should be upset.
Cheap? Depends What You're Talking About
The stock appears cheap at HK$4.675, but that is only compared to its Internet bubble high which was nearly HK$23 higher. The market cap, however, is over HK$100 billion. The core business is in decline, but interest payments have increased. This combination makes the company less attractive than pre-takeover. Of course there may be speculative value to PCCW, but that distant HK$4 floor for the stock price may turn out to be not as far away as it appears. To use the level of the old HK Telecom, or even of the C&W HK Telecom, is just not realistic as the company today has squandered much of its market value yesterday.
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