PCCW Probably Pays Intel for Involvement in PCC
Apr 27, 2001 - 23:41:08 HKT
Quamnet
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Quamnet News Service
Pacific Century CyberWorks (0008), Richard Li's communications vehicle, probably pays Intel Corp. HK$16 million (US$2 million) a year for the world's No.1 chipmaker's involvement in Pacific Century Convergence Corp. (PCC).
PCCW said on page 86 of its annual report released this week that it paid a consultancy fee of HK$16 million in each of 2000 and 1999 to an unidentified "minority shareholder of a subsidiary" for the development of facilities to provide high-speed multimedia services -- which is believed to be Intel.
Asked to identify that minority shareholder, Alex Arena, deputy chairman of PCCW's executive committee, said: "We have already made appropriate disclosure. We don't want to comment any further."
The consultancy fee could allow Intel to recoup its US$50 million investment in PCCW shares within 25 years even if it receives no dividend or generates no gains from the PCCW shares it holds.
The arrangement could also be seen as a zero-interest 25-year loan provided by Intel to fund the development of PCC. So, even if Li's dream to give broadband Internet access to people in China, India and other emerging Asian markets doesn't become true, or commercially viable, the U.S. company's risks are still limited.
Intel made the investment in August 1999 through the purchase of 77.8 million new shares in PCCW at HK$5 each. At that time, it was also announced that Intel will supply set-top boxes and related technologies to PCC but no service charges were mentioned.
PCCW, meantime, has agreed to invest at least US$50 million in PCC to ensure Intel gets paid.
PCC, intended to be the Internet service provider for its Network of the World (NOW) convergence service providing digital video viewing and web access, was originally set up as a 60-40 joint venture between Li's wholly-owned Pacific Century Diversified Ltd. and Intel in March 1998.
Li sold his 60 percent PCC stake to the publicly traded PCCW in September 1999 in exchange for 752,302,268 PCCW shares. The deal valued the stake at HK$3.76 billion to HK$5.38 billion, based on the stock's trading range of HK$5 to HK$7.15 that month.
Up to date, however, little information has been disclosed about PCC. The public doesn't even know if the development of the much touted set-top box has been completed or not.
What could be worse is that PCCW and Intel may never turn their concept into reality.
According to people in the Internet infrastructure business, submarine and terrestrial cables have always been the preferred way to deliver Internet content because they provide fast enough response time to meet the demand for interactivity of the Internet.
The concept of PCC, meantime, is to provide broadband Internet access to users in emerging Asian markets via cable modems, which will pick up signals from satellites. And because satellites in space take some time to respond to requests, Web users outside major urban centers in Asia where broadband cables aren't available will find it hard to enjoy interactive activities including ICQ and chat rooms.
As part of PCCW's acquisition of PCC, PCCW has also signed an agreement with Intel under which the U.S. company can exchange its 40 percent stake in PCC for 1.003 billion shares in PCCW. The option, which will not lapse and is not transferable, is exerciseable until September 2009. PCCW has the right to require Intel to exercise the option at the end of the option period to the extent it hasn't already been exercised.
Intel didn't exercise any option in 2000, but on March 2 this year, it converted about 5.6 percent of its interest in PCC into 138.37 million PCCW shares, and probably has sold some of them since the conversion.
Intel declined to confirm the sale, saying the transaction doesn't need to be disclosed under U.S. securities rules.
Under the agreement between PCCW and Intel, the U.S. chipmaker can sell up to 20 percent of the PCCW shares it holds (including those it receives from conversion of the option) from March 15 this year. The percentage will increase to 45 percent on March 15, 2002; 70 percent on March 15, 2003; and 100 percent on March 15, 2004.
For Intel, if it managed to sell the 20 percent shares (about 43 million) it is allowed at HK$2.40 (the price on April 9, the lowest since PCCW completed its takeover of HKT), it would have received about HK$104 million.
If the HK$32 million it got paid as consultancy fees in the past two years is included, Intel would have received a total of HK$136 million (US$17.5 million) -- already recouping about 35 percent of its original US$50 million investment in PCCW.
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