PCCW (8) A Bitter Lemon
Apr 03, 2001 - 14:18:43 HKT
QuamResearch
Rumors, anxieties and perhaps hopes for Richard's PCCW (HKSE:0008) come to the end with Cable and Wireless's (C&W) decision to dump its entire 14.7% or 3,259 million shares of PCCW by issuing convertible bonds. PCCW and C&W have been looking for potential buyers to take over the stake. Rumors about who will be the buyer have been spreading over the market since then but their efforts were finally proved fail. Investors, who hope a big hand to engulf the shares at a high price, are desperate.
Terms of the Exchangeable Bonds
C&W will issue zero-coupon bonds covering its entire 14.7% holdings with 26-month term exchangeable into PCCW shares at a minimum price of HK$3.6 per share. The final conversion price will be fixed before the end of the day. If not exchanged, the bonds will be redeemed at par on 9 June, 2003. The bonds will bring C&W net proceeds of US$1.5 billion (HK$11.7 billion).
C&W Desperate on PCCW's Poor Results
The C&W announcement comes on the heels of PCCW's full year results posting a loss of US$886 million (HK$6.93 billion), mainly due to HK$4,887 million provisions made against the company's strategic investments and decline in market value of other investments, presumably holdings in disastrous Internet-related companies. One may wonder why C&W is willing to give up all its stake at HK$3.6 per share, only one-third of its selling price of HK$9.88 per share in September 2000, for just HK$11.7 billion. Obviously, it seems to imply that C&W feels desperate on PCCW's performance and expects Richard is unable to apply magic to its PCCW within years. That explains why C&W is urging to completely detach its hook from PCCW though the price seems a bit bitter. Click For PCCW's Annual Results
Share Price Limited By HK$3.6 Till 2003
Our beloved Richard Li said that the exchangeable bond deal could just cause volatility in PCCW's share price over the next few days, but "for the medium and long term would be a milestone" since it represents a clear plan to dispose of the C&W stake. It is true that the deal relief certain degree of discomfort for shareholders by combining the two share-dumping threats into one as the other time-bomb is originally scheduled in the coming August. However, it is unlikely that the share price of PCCW will be able to climb up by removing the time-bomb as the dark cloud will remain upright PCCW's head until 2003.
A large selling pressure is expected in the coming few days as investors may swap their shares for the exchangeable bonds for more flexibility and safety. It is easy to see that whenever PCCW's share price rose above HK$3.6 per share, it would trigger bond holders to exchange their bonds for shares and dump them to capture capital gains. If we consider also the transaction costs, share price of PCCW is unlikely to exceed HK$4 per share in the coming 26 months unless someone is willing to eat up all C&W's HK$11.7 billion worth of PCCW shares.
To Hold or To Sell
At the current price of HK$2.775 per share and with 22.2 billion shares outstanding, PCCW is capitalized at HK$61.5 billion. The C&W deal is just like replacing a psychological barrier with a more real price cap on PCCW's share price with no material positive impact on the company's fundamentals. We are not optimistic about the company's profitability in the coming few years as competition remains keen and debt burden remains heavy. However, it will be very sour to ask investors who bought the counter at above HK$5 per share to sell at the current level and it does not seem a wise decision to do so. Investors would be better off to wait for, hopefully, a better price, though it is likely to be limited by HK$3.6 per share.
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