PCCW's grand vision replaced by mountain of debt
Plans for a new media powerhouse have stalled, write Rahul Jacob and Joe Leahy - Jul 18 2001 17:47:46
At a press conference last summer to announce the formal takeover of Cable & Wireless HKT, Hong Kong's dominant telecommunications company, Richard Li, chairman and founder of the internet upstart Pacific Century Cyberworks, was asked which global companies he would compare the merged entity with.
Mr Li replied that he was inclined to compare PCCW-HKT with AOL Time Warner, the global media giant.
The comparison was based in part on the merged entity's earnings before interest, taxes, depreciation and amortisation relative to those of AOL Time Warner - but it also reflected Mr Li's confidence at the time.
This week, however, as PCCW's bankers market a US$2.5bn global bond offering, analysts have been poring over similar numbers and drawing more pessimistic conclusions.
Merrill Lynch, for example, said recently it did not see PCCW-HKT as a compelling BBB category telecoms credit in the region; it preferred Telekom Malaysia, which it said had much better interest cover and a higher market capitalisation.
Since the heady days of last summer, the focus has shifted from PCCW's ambitious goal of rolling out a pan-Asian broadband internet service, to how the company will refinance and reduce the debt it took on to finance the $28bn cash and shares acquisition of HKT.
"PCCW has, in essence, been transformed from shiny new concept into leveraged incumbent," wrote Richard Ferguson, an analyst at Nomura, in a report earlier this year.
Some analysts say the company could be hard pressed to finance large capital expenditure on HKT's fixed-line network in Hong Kong over the next few years.
"It could be that all free cash flow goes towards repaying debt. There will be very little spare cash for capital expenditure on exciting new initiatives. It will be maintenance capex," says Alistair Scott, an analyst with Merrill Lynch.
Recently, PCCW announced it was drastically scaling back Network of the World, its struggling pan-Asian internet service, and losing 340 jobs.
NOW, a broadband internet service offering a lacklustre selection of weather reports, video games and lesser-known pop groups, had been touted as PCCW's "new economy" contribution to spicing up HKT's bland fixed-line telecoms business. But it was criticised by many analysts, who said a primarily English-language service stood little chance of success in the fragmented Asian market.
PCCW now says it will spend only $100m on the service over the two years starting from January 2002, down from the $190m it is expected to spend this year.
The climbdown on NOW in effect leaves HKT in much the same position as when PCCW bought it - an incumbent telecoms operator whose margins are being squeezed by ever-increasing competition in businesses like international direct dialing and IP backbone communications.
The difference, of course, is that PCCW's leveraged buy-out of HKT has left a company that had no leverage saddled with net debt of about US$5bn.
Compared with other incumbents such as Deutsche Telekom and KPN of the Netherlands, PCCW was found to be more stretched on ratios such as net debt to ebitda.
Not everyone shares this sombre view, however. Standard and Poor's, the ratings agency, said last week that PCCW had "adequate and improving debt coverage measures", while the bond issue now being marketed would give the company's financial structure more flexibility.
But fewer investors and analysts see real prospects for healthy growth from the company's principal businesses, where margins are declining. d3 Our investment thesis on PCCW - that the company will find it difficult to diversify away from Hong Kong fixed telephony - is intact," observes Nigel Coe, an analyst with Deutsche Bank.
It seems that Mr Li is no closer to building a regional internet, media and telecoms powerhouse than he was last summer.
© Copyright The Financial Times Limited 2001.
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