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Technology Stocks : PCW - Pacific Century CyberWorks Limited

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To: pennywise who started this subject	1/15/2002 3:42:49 AM
From: ms.smartest.person	Read Replies (1) of 2248

Why Should You Expect PCCW To Show Significant Gains When The Management Thinks Otherwise? (Amended Version) Date : JAN 08, 2002 quamnet.com Stephen Vines One of the most interesting aspects of the re-negotiation of Pacific Century Cyberwork's (8) ill conceived deal with Trans World International (TWI) is the company's evident belief that its share price is unlikely to reach $3.60 before the end of 2003. Were it to do so PCCW, the worst performing member of the Hang Seng Index last year, would not exactly recover but at least minimise further downside on the share price. The unintended revelation about PCCW's thinking arises from the successful attempt to unravel a quite extraordinary contract PCCW concluded with TWI in 1999. This tied the Hong Kong company into a ten year deal, rumoured to be costing US$10 million per month, for TWI to provide management advice and services on the content of the incredibly unsuccessful Network of the World (NOW) internet-carried broadcasting service. You may recall that PCCW's boss Richard Li famously described NOW as being a success shortly before it was closed down and re-launched. NOW Mark I was an English language service operated out of London. NOW Mark II is to be a sports and online games service with TWI being paid US$19m (HK$148.2m) over four years in consultancy fees. PCCW will also make a one off payment of US$11.1 million to cover redundancy and other winding up costs of its failed London operation. However the real money is being paid to World Productions Establishment (WPE), an offshore subsidiary of TWI, which will receive US$48.2 million (HK$376.2m) to be satisfied by a new issue of shares representing up to 0.7 per cent of PCCW's share capital. The 175 million shares are being issued at $2.15 per share and can only be sold if the price rises to $3.60 before 31 December 2003. Such a condition clearly implies that PCCW expects its share price to languish and does not want WPE pushing new shares into the market unless by some miracle PCCW regains shareholder's favour. We shall trip lightly round the further dilution of PCCW's shareholder's equity and consider instead the high cost of extricating Mr Li's company from its mistakes. Shareholders have not been told and are unlikely to discover how much has been paid so far to TWI for the NOW debacle but at least they know the price they are paying for getting out of the deal. It comes to comes to US$30.1 million in cash and US$48.2 million in equity, a total of US$78.3 million which is far higher than the headline figure of US$48.2 million which PCCW announced as being the cost of its new contract. However the payments to TWI do not end there because in effect the US$48.2 million is only the cost of acquiring access to TWI sports programme archive and future rights to sports programmes. In order to get access to online games PCCW will have to invest a further US$30 million for a 10 per cent equity stake in Leverlake, a games provider controlled by TWI. So this brings the total bill up to US$108.3 million. PCCW maintains that this will be offset by a US$9 million payment by TWI for fixed assets and leasehold improvements in the London premises. However we are not told the cost of these assets, which may well be going to TWI for a song. Nevertheless adding this to the equation brings the bill down to US$99.3 million (HK$775.2m). This is a lot of money to be pouring into a network that has yet to demonstrate any money making potential but is almost certainly a great deal less than the sums of money that would have had to be paid to TWI under the terms of the 1999 agreement. By the very modest standards against which PCCW's management performance is judged this may therefore be considered to be a success. Maybe this is why PCCW gave its highest paid employees the biggest pay rise among companies included in the Hang Seng Index. Although some mindless critics may feel that it is a bit odd to lavish this kind reward on the company which did most to destroy shareholder value last year, this is clearly not the view of the company's board. Meanwhile PCCW's shares continue to recover from their slump below $2. This is a remarkable tribute to the optimism of Hong Kong investors. It can only be explained by a belief that the telephone network side of the company looks undervalued. The other activities are worth more or less nothing but the worry is that they will continue eating into the profits generated by the network. The cost of the management contract was incorrectly stated in an earlier version of this column. Ends

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