The Future Is Now: PCCW's poor results raise fresh doubts about its new-economy plans
By WILLIAM MELLOR
On the night young tycoon Richard Li clinched Asia's largest takeover deal with a $28.5 billion bid for Hong Kong Telecom, the territory's main phone company, he partied with senior executives and investment bankers at the swank Peninsula Hotel. Back then, the dashing second son of billionaire Li Ka-shing was being hailed as the ultimate netrepreneur, and his upstart company, Pacific Century CyberWorks, the sexiest stock in Asia. And before leaving the festivities, Li made it clear to a colleague he expected the champagne celebration to be the first of many. "This is just the beginning," he declared.
What a difference 13 months makes. On April 1, there was another party in Hong Kong — the Rugby Sevens competition, a highlight of the local sporting and social calendar and a tribal gathering of sorts for the city's investment community. But by then, Li was no longer the toast of the town. Instead he was the butt of jokes. "Dr Richard Li," proclaimed a message that flashed onto an electronic billboard at the rugby ground, "please give us our money back."
Li, 34, didn't suffer the embarrassment of being at the Sevens to see it, but it may be the only break he's gotten in the past month of what until recently has been an incredibly charmed life. First, he was forced to admit that he never graduated with a degree in computer sciences from Stanford University, as PCCW had repeatedly stated. That was a mere dent to his ego compared with what came on March 30 — his company reported a massive $886 million annual loss, one of the biggest in the history of the local bourse. His trials are far from over. Coming months will determine whether Li can find the money and the rationale for PCCW to be more than an old-line phone company. Says Jonathan Iu, Internet analyst at SG Securities: "It's going to be a tough time for him."
The numbers are daunting. Besides its big loss, PCCW has become a company with negative shareholder equity — $1.8 billion more liabilities than assets — after writing off $22 billion of its Hong Kong Telecom purchase price attributed to "goodwill." PCCW also took a $627.3 million charge against the value of its once-vaunted portfolio of Internet investments (see the company's profit-loss statement opposite).
By April 4, PCCW shares had plunged more than 90% from a high of HK$26.42 just before the HKT deal to a mere HK$2.60. Worse, the company's dependence on revenue from its fixed-line Hong Kong telephone business made it look distinctly old economy. And the company's leaky finances caused some analysts to question whether PCCW would be able to meet the payments on $4.7 billion in debt while simultaneously funding essential expansion. Says Nomura Securities telecommunications analyst Richard Ferguson: "PCCW has in essence been transformed from a shiny new concept into a leveraged incumbent."
At PCCW's headquarters, beleaguered executives vigorously rejected such assertions, arguing the $1 billion-a-year cash flow generated by the Hong Kong fixed line telephone business, now called PCCW HKT, plus $1 billion in cash, were more than adequate to meet the company's debt commitments (the company is also obligated on a $1.1 billion convertible bond). As for its new-economy credentials, PCCW chief financial officer David Prince told Asiaweek: "Internet is critical to our future."
Prince is right, and PCCW has begun to take steps to do something more than talk about being part of the information age. The company announced last week that it will unveil within 90 days a subscription-based restructuring plan for its much-hyped but cash-bleeding Internet content provider, grandiosely titled Network of the World (NOW).
NOW, the Internet-based interactive television service once hailed by Li as the killer application at the heart of his long-term business strategy, today seems a shell of its former self. Workers who a year ago had time for little more than working, eating and sleeping now complain they have almost nothing to do. NOW's content of sport, entertainment, music and games has proved so weak that jokers say the acronym really stands for No One Watching. The company insists their vision for NOW remains buoyant.
Although PCCW's current cash flow is clearly enough to cover its $300 million in annual debt service, there's also the matter of $450 million in capital spending needed. That includes $200 million slated for NOW and other business-to-consumer Internet services, but it excludes PCCW's old-economy real estate venture with the techy name of Cyberport. This year alone, PCCW will have to pump $250 million into the 24-hectare, $2 billion commercial, residential and retail development. It will be a net drain on PCCW's ledger for several years before generating income, though Nomura Securities expects it will ultimately yield a "reasonable return."
To ease the situation, PCCW is expected to unload assets. At midweek, Asiaweek learned that PCCW and other shareholders in Singapore telecommunications company MobileOne planned to sell their shares. PCCW owns 15% of the company, a holding worth around $140 million. Simultaneously, reports surfaced that PCCW's Singapore-based holding company, Pacific Century Regional Developments, is close to signing a deal to sell its Pacific Century Insurance operation to a Hong Kong company. If PCCW still needs to raise more capital, the company can sell valuable properties in Hong Kong and Beijing. The question in almost every case is whether Li's firm is selling core or valuable assets because it makes business sense — or because it has no choice. Some analysts think PCCW has already disposed of some of its very best assets — 60% of its mobile phone business and 50% of its IP backbone company, Reach, both to Australia's Telstra.
Issuing more stock is not a money-raising option. If it wasn't clear before, the sharp fall in PCCW shares after Cable & Wireless announced plans to issue convertible bonds as the way to unload its 15% share of Li's company made it obvious. C&W's ownership came from PCCW's original cash and stock purchase of HKT, and it has been waiting to cash out of the shares as soon as it could.
Li insisted that the convertible bonds provide a clear plan for disposing of the C&W stake, an overhang that was said to be weighing the stock price down. But some analysts argue that the convertible bonds only delay the inevitable since even bondholders who convert shares in two years will dump them as soon as they can anyway. And when trading resumed on April 3, after a one-day suspension, PCCW stock fell 11%.
The lack of investor confidence goes beyond raw numbers. There is also skepticism of both Li's vision and his ability to realize it. Complains William Kaye, chief executive of the Pacific Group in Hong Kong, which runs a large Asian hedge fund: "It is very hard to tell what their business is."
One senior executive who served in the Li family empire predicts much of PCCW will ultimately be sold off, part of it perhaps to Hutchison Whampoa, the conglomerate controlled by Li's father. That, says the executive, could leave the junior Li with just a property-based company centered on the Cyberport development and a handful of telecom investments. "It's not that Richard's a lightweight," says the executive, who spoke on condition of anonymity. "But his talents lie in deal making, not running a company like PCCW."
Hong Kong banker Simon Murray, who ran Hutchison for Li's father, believes Richard has enough of his dad's business acumen to pull through. Says Murray: "That whole technology sector has had a whiplashing. But it's very good that he has the Hong Kong telco under his belt. The cash flow from that will save the day." Murray could be right, and Li and his lieutenants insist their dream is not over. Maybe not. But the vision seems decidedly hazier now than a year ago. And no one at PCCW thinks they'll be celebrating again any time soon.
With reporting by ASSIF SHAMEEN Singapore
BY THE NUMBERS
PCCW's 2000 Financial Results (US$ million)
click on link for table of PCCW's Financial Results
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