Analysts Still Cautious On PCCW Despite New Content Deal
January 3, 2002
Dow Jones Newswires
By ANETTE JONSSON
Of DOW JONES NEWSWIRES
HONG KONG -- While market players continued to bid up Pacific Century CyberWorks Ltd. (PCW) Thursday in the wake of the replacement of a high-cost content contract, analysts took a cautious approach, noting that the deal will have little or no impact on the company's valuation.
Consequently, the highly-publicized deal hasn't made any of them change their recommendations for the Hong Kong telecommunications operator, which range from underperform and neutral to buy.
But Wednesday's agreement does boost confidence in the management's ability to curb losses within PCCW's Internet operations, some analysts said, noting that this could be a reason why the share price has edged upwards.
"It's a sentiment thing. People can use it to drive up the price, but I don't think it will run up a lot because the impact of this news on the profit and loss account has been factored in previously," said Agnes Ho, telecom analyst with Merrill Lynch.
Other analysts agreed, noting that the gains have come amid a general rise in local telecom stocks and that the thin post-holiday volumes make it easy to drive up prices.
PCCW said Wednesday that it has signed a non-exclusive agreement with U.K.-based Trans World International that will bring sports programming and games to its Network of the World television and broadband channel. The deal, which will cost PCCW up to US$108.4 million, replaces a 10-year accord signed in 1999 that arranged for TWI to provide English-language content for NOW.
The cancellation of that contract is expected to result in the loss of a significant number of the 400 TWI jobs in the London production studio, for which PCCW will have to pay an estimated US$11.15 million in compensation, according to a press release.
Given that PCCW hadn't provided any indications for the cost of the original content deal with TWI, analysts are working in the dark trying to gauge the impact of the rewritten terms.
Deutsche Bank's Nigel Coe said he believes the costs related to the earlier contract were "a significant contributor" to the losses within PCCW's Internet unit. Coe estimates those losses at US$193 million in 2001, and in 2000 the Internet unit lost around US$260 million.
But even if the TWI deal is a step in the right direction with regard to cost cuts, there are plenty of uncertainties related to the Internet operations left to be resolved, analysts said.
For instance, the company has provided no guidance about how much revenue it hopes to get from the Hong Kong broadband service that the TWI content is fed into and no clear indication of how it will gain subscribers in the competitive local market.
"The company says it wants to position itself to take advantage of the (football) World Cup and the Olympics, but I don't buy that for a second. This (the TWI deal) is a cost-cut exercise, nothing else," said an analyst who asked not to be named.
CLSA's Stephen Leung was one of the more upbeat about PCCW's renegotiating of the old contract. The actual cash outlay of US$51 million for the breakup arrangement, in particular, was "very favorable," he said, as the market had estimated a cost of at least US$200 million.
However, Leung said PCCW had confirmed to CLSA that the net impact from the transactions announced Wednesday has already been captured in the company's budgeted losses for NOW, which it has earlier pledged to curb at US$190 million in 2001 and US$100 million in 2002 and 2003 combined.
Still, PCCW shares rose 4.6%, or 10 HK cents, to finish Thursday's trading at HK$2.275. The rise followed a 1.2% gain on Wednesday after the deal was first announced. PCCW, nowadays mainly held by retail investors, was also the most active stock Thursday, with HK$367.1 million worth of shares traded, surpassing even market heavyweights such as HSBC Holdings PLC (HBC) and China Mobile (HK) Ltd. (CHL).
Analysts noted that the issuance of new shares to TWI as payment for part of the new agreement does have a dilutive effect on PCCW's shares. But the impact will be fairly small, as those shares account for less than 1% of the total issued share capital.
"This deal is more important from a cost perspective in the short term," Deutsche's Coe said. "On a longer-term basis, PCCW will need to demonstrate physical revenue contribution before the market credits it with value creation," he added.
However, the deal with TWI provides further evidence of restructuring following several bond issues, staff cuts and the recent acquisition of sub-sea cable capacity by one of its joint ventures. The combined impact "could see the shares trade strongly into the first quarter of 2002," he said.
With regard to the new sports content, PCCW hinted at the chance of broadcasting two high-profile events, saying "the new arrangements will allow the company to secure and produce sports content targeted at the Asian market in the lead-up to the staging of the football World Cup in Korea and Japan and the Olympic Games in China."
A PCCW spokeswoman was unable to confirm whether NOW would obtain broadcast rights for either the World Cup or the Olympics, however. One analyst noted that since cable-TV provider i-Cable Communications Ltd. (H.ICB) already has the rights for the World Cup, added rights for NOW may not be worth that much.
"The subscriber bases of PCCW's broadband service and i-Cable probably overlap anyway, and I would think that most people would prefer to watch the World Cup on TV," the analyst said.
-By Anette Jonsson, Dow Jones Newswires; 852-2802-7002; anette.jonsson@dowjones.com
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