Doing It Dad's Way - Can Richard Li make PCCW make sense?
By JEREMY HANSEN
Normally, there's nothing unusual about a father and son sharing a meal. But when Pacific Century CyberWorks (PCCW) chairman Richard Li and his father Li Ka-shing, Hong Kong's richest tycoon, met for lunch in a Hong Kong hotel in January, the highly exposed and paparazzi-ridden repast had the distinct flavor of a publicity stunt. PCCW's stock, under siege since the global tech-stock bubble burst, was being beaten down again, this time over fears that PCCW stakeholder Cable & Wireless could flood the market with 1.2 billion PCCW shares when a lock-up period on the stock ended Feb. 17. Were the pair meeting to discuss conditions under which Papa would rescue son by mopping up the Cable & Wireless shares?
Later, the elder Li told newspaper reporters his Hutchison Whampoa conglomerate would not invest in PCCW, but he didn't rule out taking a personal stake. Lunch nevertheless had a positive effect on the stock, which jumped 25% in the next four days. Alas, it was a short-term fix at best. Richard Li has yet to answer any of the bigger questions that weigh down PCCW, including worries that its debt load is too high and that it is rudderless following its acquisition of Cable & Wireless HKT, Hong Kong's largest phone company. Investors, anxious over the 80% fall in PCCW stock since it peaked a year ago, want clarity, and PCCW "hasn't been very clear about the strategy," says Greg Feldberg, Internet analyst at Indosuez W.I. Carr Securities in Hong Kong. (PCCW executives declined Asiaweek's requests for interviews.)
If the company is suffering from an identity crisis, it's easy to see why. At the height of the global boom in Internet and technology companies last year, Li launched PCCW like a Net-age missile. The company planned to roll out broadband Internet access services across the region along with cutting-edge interactive content from studios in London. The stock price soared on Hong Kong's bourse, enabling Li to invest in scores of Internet start-ups and to pull off a remarkable $28.5 billion acquisition of Cable & Wireless HKT. Since then, the dotcom crash and the slower-than-predicted spread of broadband access have placed on indefinite hold Li's new-economy aspirations — and investors have been left to anxiously wonder what kind of company they now own.
In fact, stripped of its shiny new-economy veneer, PCCW resembles nothing so much as an old-style Hong Kong conglomerate — one so similar to Li Ka-shing's Hutchison Whampoa that father and son even compete in areas such as cellular phone service. Both PCCW and Hutchison have significant telecommunications holdings; both have property arms; both spawned money-losing Internet portals (Hutchison spun off tom.com, while PCCW started Network of the World). A key difference: Hutchison Whampoa, one of the world's largest port operators, is a highly profitable company that Barra Global Estimates expects to pull in $5.4 billion in profits in this financial year. PCCW, still in the midst of digesting Cable & Wireless HKT, is an unproven performer struggling to control the bleeding from a number of money-losing ventures.
The biggest drag on PCCW is, no surprise, the Internet. According to a Jan-uary report from Indosuez W.I. Carr Securities, PCCW's Internet properties will lose an estimated $322 million this year. Numerous start-ups the company invested in during the boom may never reach the black. PCCW had originally hoped to exit these start-ups — which include a venture capital company, a data storage firm, a business-to-business e-commerce platform, and a broadband advertising company — via Initial Public Offerings, but the high-tech market slump scuppered those plans.
Meanwhile, a Hong Kong video-on-demand and broadband Internet access service PCCW inherited from HKT has been a consistent money-loser. The operation is renting bandwidth to competitors while remaining undecided about the ultimate fate of the interactive TV service. And officials have already announced that the firm will cut funding for Network of the World (NOW) by one-third to $1 billion in the next five years.
But is the picture as bleak as investors seem to think? PCCW shares have been trading recently at about 60 cents a share; analysts say the company's break-up value is higher, about 77 cents a share, largely on the strength of its telecommunications holdings. True, Hong Kong's deregulated phone market means traditional cash cows such as international long-distance are dying, but PCCW's fixed-line telephone business alone will post about $1.1 billion in pre-tax earnings this year. The company's cash flow is more than adequate to service interest payments on its $4.7 billion in debt, and PCCW even has adequate borrowing headroom to fund regional and global expansion, according to analysts.
Before too long, PCCW could also begin to book revenue from its $2 billion high-tech property development, an office/residential community on the shores of Hong Kong island. The first phase of the so-called Cyberport is slated to open at the end of the year. "{HKT has} already had the worst of it," says Feldberg. "There's not a whole lot of further downside." Indeed, analysts reckon PCCW this year will manage what few dotcoms will — a profit. According to First Call, profit estimates range from $281 million to $1.15 billion.
As for the future, the sharpest arrow in PCCW's quiver may be its partnership with Australia-based telecommunications giant Telstra. Telstra first hooked up with PCCW when it agreed to help finance the takeover of Cable & Wireless HKT. The companies since then have refined their partnership. Last week, after Li returned from the World Economic Forum in Davos, Switzerland, PCCW announced details of a $1.8 billion alliance with Telstra. The deal includes the formation of an Internet "backbone" company, a regional mobile phone business and a data storage arm. Telstra and PCCW had previously formed a 50/50 joint venture combining their undersea cable holdings. That venture created Asia's largest carrier of data traffic and second-largest carrier of international voice calls. Senior sources in the new joint venture hope the good bits of their respective corporate cultures will rub off on each other — that is, Telstra is slightly stiff and bureaucratic, and could benefit from some of PCCW's pluck.
Problem is, PCCW seems unable to convince markets spooked by tech and telecom stock woes that it has a plan to go with that pluck. The stock price has been depressed by a variety of factors, including the threat of Cable & Wireless dumping half of its 15% stake in the company on the market starting this month (a lockup period on the remaining shares expires next August). Cable & Wireless CEO Graham Wallace recently made a rare move to soothe investors' frazzled nerves, saying he is in no hurry to dispose of his company's PCCW stake.
In some ways, the lack of any sweeping strategic statements from PCCW headquarters is a sign that it has learned from past errors. "{PCCW has} made the mistake of promising a lot to begin with and not delivering it later," says Jonathan Iu, Internet analyst at Hong Kong's SG Securities. "Now I think they are communicating less and focusing on delivery." And that means more than a take-out lunch with Li Ka-shing.
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