Deal May Signal How Hutchison And CyberWorks Might Co-Exist
February 26, 2001
Tech Center
Deal May Signal How Hutchison
And CyberWorks Might Co-Exist
By GREN MANUEL
Staff Reporter of THE WALL STREET JOURNAL
A deal last week between Li Ka-shing's Hutchison Whampoa Ltd. and his son Richard Li's Pacific Century CyberWorks Ltd. could signal how two of Hong Kong's corporate giants, once fierce competitors, have found a way to live together.
In the deal announced Thursday, Hutchison ended up with a 0.83% stake in CyberWorks, priced at 803 million Hong Kong dollars (US$102.9 million) at that day's closing price, in exchange for an international satellite-communications business. Both sides agreed the satellite-communications operation made more sense inside CyberWorks than Hutchison. It's the latest sign that the two giants are finding ways to co-exist.
From fixed-line and wireless to international telecommunications business, Hutchison once saw the offering of every new telecom license in the city as a battleground to attack Hong Kong Telecommunications Ltd., the old British-controlled phone monopoly that dominated this city's telecom industry. Hutchison seemed to relish every opportunity to compete with the larger but slower rival. But now that the younger Mr. Li has swallowed Hongkong Telecom, Hutchison is chasing different prey.
Separate Empires
Throughout the early 1990s Hutchison became an aggressive new telecom player, seizing every opportunity to attack what its management saw as a staid Hongkong Telecom, then owned by Cable & Wireless PLC.
1Pacific Century CyberWorks to Buy Hutchison Whampoa Satellite Unit (Feb. 23)
But a lot has changed in the six months since CyberWorks bought Hongkong Telecom and renamed it PCCW-HKT. For one, the image of the younger Mr. Li -- recently seen as a highflying entrepreneur who could do no wrong -- has taken a beating.
While Richard's older brother Victor is seen as the heir apparent to the Li family empire, ranging from ports to real estate and retail with a current market value of HK$660 billion, Richard got a loan from the family coffers in his early 20s and struck out on his own. Keen to be seen as a successful entrepreneur in his own right, he bridles at suggestions that intermittent business dealings between his own firms and those controlled by his father amount to paternal bailouts for deals gone wrong.
He seemed to have proved his mettle last year. In August Richard Li pulled off a coup, in part by using sky-high market valuations for CyberWorks to buy Hongkong Telecom. For a while, it seemed as if the son may surpass the father. Since then, however, his company's share price has gone into a tailspin, losing three-quarters of its value -- steep even by tech-stock standards. Meanwhile, CyberWorks is still sitting on a heavy load of debt from its takeover of Hongkong Telecom.
The other change is that the competition between father and son -- or at least between their businesses -- has cooled as both sides have refined their strategies. Linus Cheung, vice chairman of CyberWorks and former chief executive of Hongkong Telecom, says Hutchison isn't a "deadly rival," but a "friendly rival." Yet, Mr. Cheung says the two firms remain highly competitive.
It's a delicate, but necessary high-wire act. Hong Kong's industry regulator, the Office of the Telecommunications Authority, takes a dim view of cartels and has sweeping powers to smash them. With Hutchison the third-largest firm on the local exchange, any link with CyberWorks, the eighth largest, would be political dynamite certain to bolster criticism that the Li family already dominates Hong Kong commerce. But rather than forming a cartel, it has become increasingly clear in recent months that the dual Li empires are evolving in directions that will leave them with few areas of direct competition.
An analyst with one European brokerage house, who declined to be named, called the strategy "just common sense." As the Hong Kong telecom market has matured, for the two firms to go head-to-head in a low-growth market could trigger big price cuts with no corresponding increase in demand. Richard Li should have no problem in avoiding the corporate juggernaut of Hutchison: Until last August when the Hongkong Telecom takeover was completed, he was an executive director in his father's company. When CyberWorks bought out Hongkong Telecom, the younger Mr. Li severed all links with Hutchison.
Take mobile communications in Hong Kong, an area in which Hutchison and Hongkong Telecom were fierce rivals in one of Asia's most competitive markets. Earlier this month, CyberWorks finalized a deal that put Hongkong Telecom's old mobile-phone business into a joint venture, with its partner, Telstra Corp. of Australia, in control of management. Yet while CyberWorks seems to be turning its back on wireless, Hutchison is increasingly interested in nothing else -- ending their greatest area of conflict. CyberWorks also put its international data operations into a joint venture with Telstra and installed independent management, reducing direct conflict with Hutchison Global Crossing Ltd., the fixed-line business that Hutchison operates jointly with Asia Global Crossing Ltd.
Although CyberWorks' fixed-line network in Hong Kong competes directly against Hutchison Global Crossing, one analyst with a European brokerage said CyberWorks' dominance remains so great that Hutchison is a long way from being a serious competitor. The two remain rivals in the consumer Internet business and some other areas.
Similar Philosophy
But there is at least one area of clear cooperation. When the elder Mr. Li floated his consumer Internet business Tom.com Ltd. last February, CyberWorks got preferential access to a 4.25% block of the sought-after shares at a 40% discount.
In internal industry squabbles, the two companies frequently seem to be of one mind. Usually, the only public glimpse of this comes when those concerns are aired in the city's Legislative Council. Legislator Sin Chung-kai, who represents the information-technology sector and who chairs the committee that is the forum for these rows, says CyberWorks and Hutchison "seem to have close opinions towards some regulatory issues."
He notes that when the government proposed forcing operators of third-generation mobile phones to lease network capacity to outside firms, CyberWorks and Hutchison were opposed while all the other mobile operators supported it. The two giants both favored auctioning off licenses for these advanced services, while the other players weighed in against. Mr. Sin also notes that, when the Legislative Council held hearings last week on the financial terms of CyberWorks' agreement to connect fixed-line calls for its rivals, Hutchison voiced no complaints while the other two fixed-line operators expressed bitterness over the practices of CyberWorks.
A year ago, when CyberWorks first wanted to bid for Hongkong Telecom, Mr. Sin protested that the Li family seemed to be running everything in Hong Kong. "At the time they told the media that they were two independent companies and they would be run independently," he says. "But now one year after that they seem to have some form of strategic alliance." As conclusive proof, Mr. Sin offers last week's satellite-communications deal.
CyberWorks' Mr. Cheung dismisses concerns over the seemingly cozy relations between the two firms. "That's just a coincidence," he says. "We operate separately, and we make decisions entirely independently with our own shareholders in mind." He adds that the satellite deal was "an exceptional arrangement" as the firm was founded by the younger Mr. Li in 1994 (it was sold to Hutchison in 1995) and fits well with CyberWorks' business.
There are strong reasons why the two companies would have similar views on regulation: As incumbents, government proposals aimed at helping new or small competitors would unite them in opposition.
Hope for Rescue
But investors on the street don't want to hear of convergent thinking or similar philosophy. They want the elder Mr. Li to get out his checkbook, or Hutchison's checkbook, and help his embattled son with hard cash. CyberWorks' shareholders, who have been battered by the falling value of their holdings, still hope that "Superman" Li, as local media dubs the father, may yet either directly or indirectly take a stake in CyberWorks. Speculation about such a link has been a key factor in supporting CyberWorks' share price this year. Last week's deal -- even though analysts say the value of the transaction was tiny for both firms -- was enough to push CyberWorks shares up 4% to HK$4.55 on Friday.
Stephen Leung, a telecoms analyst at Credit Lyonnais Securities (Asia), said that, for CyberWorks, last week's deal "doesn't have any impact at all. It just creates some sort of excitement for the retail investors."
"In the local market people are always speculating when the father is going to help the son," adds Kelvin Ho, an analyst at Nomura International (Hong Kong).
An analyst with a different European brokerage firm, who asked not to be named, said the deal was nothing more than "news management," aimed at igniting hopes of Mr. Li the elder coming to the rescue. Institutional clients, he said, were unmoved, instead concentrating on fears for CyberWorks' fixed-line network in Hong Kong and price pressure if Cable & Wireless dumped the CyberWorks shares it received as partial payment for Hongkong Telecom.
If past experience holds, it doesn't take a concrete deal between the two firms to get CyberWorks' shares moving north. Their biggest rally this year -- a rise of more than 25% in four days -- came after father and son took a highly publicized lunch in the city's Shangri-La hotel. Although the meeting signaled nothing immediate, it did raise investor hopes that a rich and powerful father would step in to help out his son.
Write to Gren Manuel at gren.manuel@awsj.com2
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