PCCW (8) Fate Hangs in the Balance
Feb 19, 2001 - 13:51:41 HKT
QuamResearch
No buyer has been found, and the lockup period for 4.9% of the firm's shares held by Cable & Wireless (C&W) has expired. PCCW's position on the local bourse again looks somewhat precarious. Both PCCW and C&W have been looking for somebody to take over the stake in order to have a fairly orderly transfer of the shares and hopefully provide some stability for the counter. This has been difficult to do, however, due to both the weakness of the telecom sector and general disillusionment with Cyberworks itself.
Lock-Up Ends: Now Versus Then
The lockup period ended on Saturday, enabling C&W to sell 7.65% of PCCW. The 1.63 billion shares were worth HK$7.5 billion at the Friday HK$4.625 close.
The last time this happened, the picture was far uglier than it is at the current moment.
On September 21, 2000, as soon as the first lock-up period expired, C&W dumped 4.9% of PCCW at below the market price. The sale came just one week before PCCW's first results announcement, and that was viewed as a rather cynical comment on what the British telecom really thought of HKT's replacement owners. The HK$9.88 per share for the 1.04 billion shares dumped via Merrill Lynch and friends generated HK$10.28 billion for C&W. The local market did not react kindly since the previous close was nearly a dollar higher than C&W's fire-sale price. With turnover in the shares jumping some fourteen times over the previous ten day average, the shares plummeted nearly 16%.
Of course, the shares have since that fateful day lost another 50% of their value, so the old days when PCCW's share price was higher than its stock code are long gone.
On that day, the shares opened at HK$9.90, 8% below the previous day's HK$10.75 close. Though they dipped as low as HK$8.95, some speculative buying occurred among the HK$14.1 billion worth of shares changing hands, so the counter ended that harrowing day at HK$9.05.
This time, however, the picture looks oddly different. On the Nasdaq, despite a 5% fall in the tech index, PCCW's ADRs fell only 2.6% and volume was rather low at around HK$8 million. The ADRs were, however, trading at a 4% discount to the local version, but that is not always the case.
Tracing the Share Capital
Originally, following the sale of HK Telecom to PCCW, C&W was left with a 21.4% stake (20.2% diluted) in the local internet startup and phone business but quickly shed 1.2% of that for CMGI shares. Then, on Sept. 21, the infamous 4.9% dump occurred, leaving C&W with 15.3% (14.5% diluted) of PCCW, about 3.26 billion shares. The sale took place one week before PCCW's results announcement, so this added to the uncertainty. The next lockup period ended on Saturday, February 17, where half the remaining stake could be sold. The final 7.65%, 1.63 billion shares, can be sold in August (presumably August 17), one year after the original HKT sale.
Reasons Maybe Why Not
The question is exactly why haven't things worked out quite as poorly as the last time around? There is definitely some pressure on PCCW, but not as much as expected with C&W now free to sell. The answer is fairly simple: the company doesn't need the cash at the moment, and most likely they have agreed with PCCW to not sell the stake in the market but to continue to try to find someone to take over the holding as a strategic investment. However, it is also very likely that regardless whichever parties are currently in talks, there have been no strong expressions of interest, especially at the current price levels. It is also distinctly not in C&W's interest to dump 1.63 billion shares on the market and repeat is first fiasco since it still has one more time to go.
Buy, Sell, or Hold
We simply remind investors that it appears that C&W anxiously wants to exit PCCW as quickly as possibly, preferably once and for all. It has seen the damage a major sell-out can do via its first chunk liquidated back in September. If it does the same this time, what will be left for its remaining 1.63 billion shares? And wouldn't it be better for C&W to get rid of the whole thing in one go right now at a higher price while giving the appearance of support to PCCW?
Whether or not a strategic investor can be found for C&W's stake, C&W's current willingness to hold out does not represent faith in HKT and its current owner. Instead, it is simply self-interest, for by doing so it can perhaps fetch a better price and exit quickly and quietly. Thus our suggestion for investors is that they not look towards C&W for any positive indication of value in PCCW. At HK$4.625, PCCW's market cap is HK$100 billion, and if HKT's net profit comes in substantially lower at just a few billion, as expected and rumored, then one is paying dearly for the privilege of investing in an internet VC whose major asset seems to be imploding.
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