AWSJ:HK Exchange Waives Rules For Pacific Century CyberWorks
11:55, 2001-03-30
By Gren Manuel and Matt Pottinger
Staff Reporters
HONG KONG -- The Hong Kong Stock Exchange has quietly agreed to stretch its
rules to accommodate Pacific Century-CyberWorks Ltd. even though the Internet
and telecommunications conglomerate's liabilities are greater than its assets
-- a move that could stir complaints the company is getting special treatment
from city authorities.
PCCW reported a negative net worth at the end of 2000 of US$1.8 billion on
Wednesday when it announced weaker-than-expected year-end results, unleashing a
torrent of selling that briefly pushed its share price to HK$2.975 (38 U.S.
cents), its first dip below HK$3 since June 1999. The share closed on Thursday
at HK$3.25, down 22.5 cents, or 6.5%.
Company executives and analysts say the negative net worth, which was the
result of a conservative accounting treatment of its US$29 billion acquisition
of Cable & Wireless HKT Ltd., was a bookkeeping issue that wouldn't hurt the
company's cash flow or its ability to pay off debt.
The Hong Kong stock exchange's rules require companies to seek shareholder
approval for any transaction involving 50% of its net assets. Since PCCW
reported negative net assets for the latest year, the rules suggest it would
have to consult its shareholders on all notifiable transactions, such as
mergers and acquisitions.
But a company statement Thursday night disclosed for the first time that
following the August takeover of HKT, the exchange granted a waiver to the
company in which shareholders would only need to be notified of transactions if
they exceeded HK$2 billion. The date of the waiver wasn't disclosed, but it was
agreed that the arrangement would be reviewed when the company announced its
annual results this week. PCCW said in the statement it was seeking that review
and ""will apply for such further waivers as may be appropriate.""
The exchange's waiver may reignite claims that PCCW Chairman Richard Li is
getting an easy ride from the city's authorities.
Democratic Party legislator Sin Chung-kai, a critic of previous deals
involving Mr. Li, when told of PCCW's arrangement, said it constituted special
treatment for the company and called on the government to investigate.
City authorities have been accused of favoring Mr. Li on previous occasions,
including awarding his company -- without calling a tender -- a contract to
build a US$2 billion technology park named Cyberport on a large, valuable piece
of coastal land.
The exchange declined to discuss the PCCW waiver, saying such disclosures
were up to companies to make. But it said in general, the exchange had to
""balance regulatory requirements and investor protection without restricting
the issuer's business activities.""
Exchange rules state that the asset test may be waived if a company can show
its balance sheet ""does not reflect the real value of the business.""
Meanwhile, completion of some deals with Telstra Corp. of Australia in
February will have improved its asset position since the end of 2000, figures
from PCCW indicate. These deals will cut the company's net deficit by about
half to US$925 million, the figures show.
Although the net liability is a first for a major company in Hong Kong,
PCCW's deputy chairman, Francis Yuen, said it was common in other financial
centers such as London. Most analysts agree that the company won't have a
problem servicing the debt it took on during the August takeover.
The latest figures prompted analysts who had been bullish on PCCW to
downgrade their recommendations. Some had kept their ""buy"" opinion even as the
stock fell from HK$17 at the time of the August takeover.
In its year-end report, PCCW announced a US$667 million charge on bad
investments. Statements about the prospects of its newly acquired telecom
business did little to impress analysts.
""It (the deficit) is something we'll look at very carefully, but these are
book values. Their cash flow should allow them to cover at least the interest
on their debt. They're financially strapped but not financially distressed,""
said an analyst in Hong Kong.
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