Internet superboy hits kryptonite
The bond issue at Richard Li's PCCW highlights the group's problems, says Joe Leahy
Published: April 2 2001 16:29GMT | Last Updated: April 2 2001 18:21GMT
By any measure, the past couple of weeks have not been good for Richard Li, chairman of Pacific Century Cyberworks, the Hong Kong internet and telecommunications company.
The former internet superboy was forced to admit he had not completed a degree in computer engineering at Stanford University, as had long been claimed in PCCW publicity material, widening a credibility gap about his managerial abilities.
Then last Wednesday his company announced a record net loss for a Hong Kong corporation of HK$6.91bn ($885m) during 2000, mostly on write-offs from its investments in other internet companies.
On Monday, to try to turn the tide, the company struck a deal with Cable and Wireless to offload its remaining 14.7 per cent stake in PCCW through an exchangeable two-year bond offer.
The bond will mature in June 2003 and is convertible into PCCW shares between a range of HK$3.6 to HK$3.8. The market will be watching to see if this latest deal from PCCW, a company that made its name for its deal-making abilities, restores some magic to its battered shares.
Not everyone is convinced. In a note to clients On Monday, CLSA, the investment bank, pointed out that the exchangeable bonds, which offer a lower risk al ternative to PCCW's shares, might prompt some fund managers to switch out of the shares into the bonds. This would place further pressure on PCCW's shares, which have been in a nearly 40 per cent free fall since the beginning of this year.
More worrying for Mr Li, however, is that the results released last week confirmed an alarming trend that analysts had long suspected - revenues and margins in PCCW's cash-rich businesses, particularly the recently acquired Hongkong Telecom, remain under intense competitive pressure.
"While we agree that PCCW has no solvency problem, limited financial flexibility places constraints on growth," said Edison Lee, telecoms analyst with CLSA in Hong Kong. "Its net debt to market capitalization ratio was 53 per cent at the end of last year, which is the highest in Asia for integrated operators."
The results announcement caps a turbulent six months for Mr Li and PCCW. Since completing its US$28bn, cash-and-shares takeover of HKT from C&W of the UK in August last year, PCCW's share price has plunged about 80 per cent. The falls have been driven partly by global sentiment towards telecoms and technology.
However, the declines have also stemmed from scepticism over the ability of the new management to deliver its promise of transforming HKT, a stodgy former monopoly, into a regional internet giant. Such scepticism has been stoked by the revelation about Mr Li's Stanford degree.
After Mr Li avoided a crowded press conference following the annual results - leaving embarrassed directors to field awkward questions about his CV - he was inevitably peppered with queries about the Stanford issue at Monday's press conference to promote the exchangeable bond deal. More troubling for the company than Mr Li's perceived lack of academic prowess is the state of the company's operations.
According to the company's pro forma calculations revenue for the core telecoms services in full-year 2000 was HK$20.2bn, down 7 per cent compared with a year earlier. This was driven by a 34 per cent fall in income from international calls as competition in Hong Kong's overcrowded telecoms market increased. ING Barings said the fall was nearly double its forecast of an 18 per cent decline.
Other business units were also under pressure. PCCW's fibre-optic cable operations, which have been injected into Reach, a joint venture with Australia's Telstra, reported revenue of HK$7.340bn. This represented a 20 per cent fall compared with a year earlier, according to estimates by Morgan Stanley Dean Witter.
PCCW, which also wrote off a HK$22bn goodwill charge against reserves, has pinned much of its hopes for regional expansion on Reach because of its position as Asia's second-largest internet protocol backbone provider. However, according to Nomura International, potential undersea cable capacity in the region by the end of 2002 could increase 70-fold and "result in a glut".
Nomura contends that PCCW will be forced to sell off more of its stake in Reach and its joint venture with Telstra to service its debt repayments, which are expected to peak at about US$2.3bn in 2005.
"PCCW cannot generate sufficient cashflows to repay the principal - suggesting a long-term need for external funding," Nomura said.
Mr Li may not have a degree from Stanford but he is fast earning one from the university of hard knocks.
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