FEER(4/19): Shroff - A Memo To HK PCCW's Richard Li
By BRUCE GILLEY
Dear Richard,
We're a little concerned about the plight of your Hong Kong telecoms and Internet company, Pacific Century CyberWorks. As you must know, its shares are now worth less than HK$3 (38 U.S cents), down 90% from their peak of HK$28 in February 2000.
Sure, the global crash in tech shares is part of the reason. But PCCW has to take more than its fair share of the blame. Unrealistic business plans, over-aggressive PR, and a lack of corporate transparency have soured investors on your company. Moreover, the numbers you just released do not inspire confidence. Your company lost $219 million last year, not including the hefty $667 million in provisions you made for dud investments and overhyped business valuations. You owe banks $5 billion, which is going to keep you out of operating profits for many years to come.
We've been talking to analysts and thinking about what steps you might take to convince investors that PCCW is not a penny stock. Here are a few suggestions.
1. Sell Cyberport. You'll recall there was some controversy when the Hong Kong government awarded this science park project to PCCW without a tender back in 1999. Now that you've begun construction and secured anchor tenants, it would be a good time to walk away from a project that looks more like real estate than hi-tech. A well-timed sale would raise $1.5 billion and save you $300 million in spending this year.
2. Jettison Network of the World, or NOW. This broadband interactive entertainment channel was a great vision while it lasted. Some say NOW is the leverage that helped you buy Hongkong Telecom. But NOW shows no prospects of making money any time soon. There's got to be another dreamer out there who you can pay to take it off your hands. If not, shut it down.
3. Get aggressive with Hong Kong local telecoms again. The telecoms assets of Hongkong Telecom remain your most prized possession, chipping in $1.2 billion in pre-tax profits last year. But the company continues to operate like a government monopoly and traditional phone line revenues are falling. You need to focus on this business again, emphasizing broadband data services and systems integration.
4. Be realistic about the Telstra alliance. Getting the Australian telecoms giant on your side may have saved PCCW's skin. Telstra is now in a position to keep your regional mobile phone and Internet infrastructure drives alive. But both businesses face stiff competition in the region and demand growth is slowing. You need to stop pretending they are worth more than 15 times 2001 earnings, multiples that only existed in the bubble days. Indosuez W.I. Carr Securities proposes a multiple of six.
5. Reduce staff, including overpaid executives. With 15,000 staff, PCCW looks a little plump in current market conditions, 30% too plump according to analysts at Kim Eng Securities. Your promise of no lay-offs at Hongkong Telecom for one year expires in August. You should sharpen your axe now. Also included should be some of the myriad of highly paid strategic advisers and other executives you hired when the going was good. Many are on expatriate salaries that aren't justified anymore. They should go too.
6. Improve your image. We thought of asking you to resign. But you have such good connections -- to banks, to the Hong Kong and China governments and to your father, Li Ka-shing -- that we decided that would make things worse. But investors are unhappy, not least because it turns out you never won a degree from Stanford as your company once asserted. You've made a good start in sounding humble. But you need to do more. Buy more of your shares. Schedule monthly press conferences with journalists. Give more time to analysts and shareholders.
Richard, your leveraged $28 billion buy-out of Hongkong Telecom last year was brilliantly executed. When it was announced, PCCW shares had enjoyed a six-month upward ride thanks to your excellent salesmanship. You paid previous owner Cable & Wireless for it partly in PCCW shares valued at HK$16 each.
It's clear who got the better deal. You have one of the most profitable telecoms companies in Asia. Cable & Wireless, meanwhile, is trying to sell its remaining 14.9% stake in PCCW to holders of $1.5 billion in convertible bonds for as little as HK$3.60 a share. That means the final sale price for its 54% stake in HKT could fall to $10 billion from the $16 billion it announced to shareholders when the deal closed last August.
But even the greatest buy-out kings have to learn to create new value out of the assets they acquire. Your pledge last August to double PCCW's market capitalization to $94 billion would imply a share price target today of HK$33. You have your work cut out for you.
Yours in Earnest, Citizens Concerned with the Future of PCCW
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