Oops!... PCCW Does It Again
By Christina DeFalco, AsiaWise
15 Jan 2001 17:30 (GMT +08:00)
Much-maligned Pacific Century Cyberworks, last year's worst-performing stock on the Hang Seng Index, is making big headlines yet again, and the news isn't good. The stock dropped 7.7% to close at a 17-month low at HK$4.20 today, and could have more room to fall.
Investors are worried that C&W shareholders will sell off their PCCW shares at the end of a lock-up period in February. They are also concerned that Richard Li is just digging himself in deeper as the company struggles to put together a long-term source of revenue.
The stock had already been falling last week because of debt worries. PCCW recently had to raise its rates on its $4.7 billion loan to keep lenders happy. Banks haven't been too keen to jump into PCCW's $9 billion pile of debt, and telecommunications companies aren't their favorite borrowers at the moment, anyway.
PCCW has also had to increase payments on $1.5 billion of loans for its joint venture. Internet Protocol Backbone Co., PCCW's joint venture with Telstra, ended up raising the range on its loans to 75-135 points from the originally agreed-upon 50-80 basis points over Libor. Analysts estimate this could cost the JV up to $6.1 million extra.
Granted, the rate hike isn't going to be a fatal blow to PCCW. Greg Feldberg, a securities analyst with Indosuez W.I. Carr, says that since its interest rates are tied to the U.S. borrowing costs, the hike is roughly offset by the U.S. Federal Reserve’s recent cut. And, Feldberg adds, PCCW even with the extra points is paying about the same rate as that of U.S. telecom player AT&T.
But the rate hikes brought those nagging suspicions about PCCW and its leader Richard Li. Exactly how is PCCW going to make money? It originally hooked its investors by touting itself as a tech company, promising innovative New Economy entrepreneurship at its finest. So it bought itself a phone company – a former monopoly that will soon be fending off new competitors. Sure, that gives it a steady stream of income for now, but doesn't inspire dreams of big money to come -- especially since the heavily leveraged telecom provider can expect loss of pricing power with the deregulation of the industry.
As for long-term revenue generators, people are still scratching their heads about PCCW’s poster-child Network of the World (NOW) project. A broadband content provider, it's already had problems with both its broadband services and its content. No one seems too impressed with the content, which was supposed to be so compelling its viewers would happily engage in e-commerce and other state-of-the-art applications. And establishing broadband infrastructure to provide the content across Asia will require lots of time and huge capital expenditures. In India, for example, the NOW portal in has already met infrastructure delays as it lays its broadband network. With wireless and satellite bringing increasing competition, the advisability of such a huge investment in broadband seems questionable.
These and other problems have reinforced investor skepticism about the company's ability to generate revenue, other than draining its fixed-line service income. The growing doubts about PCCW’s outlook exacerbates the potentially devastating effects of the stock overhang. C&W will be free to unleash half of its approximately 14% stake in PCCW in February – millions of PCCW shares hitting a market that's already giving the stock price a serious beating. PCCW was desperately searching for a buyer, and reportedly hired investment bankers Salomon Smith Barney and Chase JF for help. Unless PCCW can find someone to buy the stock, which doesn't seem likely, we could see a repeat of what happened last September when C&W released 4.9% of its holding. PCCW's stock plummeted 16% in one day.
Analysts say that's the main reason behind PCCW's recently tumbling stock price. No matter how low the price is, investors know there will be a large glut of PCCW shares real soon. What will happen when it hits? Investors looking for long-term value may still not buy even at rock-bottom prices, based on doubts about the company. PCCW destroyed a lot of value of the company during the takeover, and even the good assets have been saddled with an awful lot of debt.
With its stock already at HK$4.20, further loss in value will hinder Li’s attempts to raise more money to finance his long-term projects. Add to that PCCW's cutbacks and postponements, the company's growth prospects don't look good. Sure, it may be raising its fixed-line fees, but that's just a drop in the bucket. To repay its billion-dollar loans, PCCW is going to have to make some substantial progress in putting together revenue-generating projects. In the meantime, investors will likely stay away from the stock.
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