Great leap backwards?
Thursday, July 4, 2002
SIMON PRITCHARD and BEN KWOK
To say the least, Richard Li Tzar-kai defies conventional wisdom when it comes to telecommunications strategy. The Pacific Century CyberWorks chairman drew relieved reviews for the firm's latest debt-reducing asset sale, but investors were left scratching their heads about future plans.
CyberWorks was always going to be a debt-repayment machine after its audacious 2000 leveraged buyout of Cable & Wireless HKT, but apparently half-formed plans to potentially re-enter the mobile sector 18 months hence while planning unspecified future asset sales do not make for clarity.
What kind of company eventually emerges from the once globally ambitious CyberWorks may not be entirely up to Mr Li, with markets ravaging heavily indebted players. For now it remains a rag-tag telecoms and property conglomerate.
Analysts reckon the US$614 million sale price for its remaining 40 per cent interest in Regional Wireless, which holds SAR mobile operator CSL, was conducted at fair value, but the deal did little to abate investor blues.
Against the backdrop of accounting scandals and a global capacity glut, there is little appetite for telecoms stocks. CyberWorks may be defensively positioned due to its dominance in the SAR home line rental market but its share price remains under pressure, closing yesterday at HK$1.82.
Attention remains focused on the industry's multiplying negatives. Poor performance of early third generation (3G) network offerings, lower-than-hyped transmission speeds, a lack of killer content and competing wireless broadband services dog its prospects.
Against this backdrop, CyberWorks' exit from a minority venture was generally welcomed. Whether Mr Li understands the apparent finality of the move is not clear. Referring to the retirement of a US$750 million convertible bond issued by Telstra, he told the South China Morning Post last week: "The logic is simple, for US$750 million we give up the mobile business for 18 months."
In suggesting CyberWorks could return to the capital expenditure-burdened sector after a non-compete agreement with Telstra had lapsed, he seemed to be positioning himself as a savvy asset trader - a talent that until recently was his father's unquestioned forte.
With a thrust for the deal, he said: "By being sensible, we could be the last survivor."
Whether Hutchison Whampoa chairman Li Ka-shing - perilously exposed with a US$16.7 billion European 3G commitment - appreciated his son's critique of 3G services prospects can only be guessed at.
What is clear is that CyberWorks has been forced to radically rein in plans to become a full service industry player. Investors have been told to expect further disposals with its 50 per cent stake in regional bandwidth wholesaler, Reach, likely to raise up to US$2 billion. That could reduce its debt to US$2 billion, down from the US$12 billion raised to finance its takeover of Cable & Wireless HKT.
CLSA analyst Stephen Leung said: "Management's commitment to debt reduction suggests any part of the company is for sale at the right price."
Judged against Mr Li's post-takeover promises not to asset-strip the firm, the end-game looks perverse. Viewed against harsh market conditions and the reality of such a buyout exercise, it looks like skilful execution.
Whether what is left of the firm provides reason for excitement is another matter.
CyberWorks executives have sought to distance the company from the Cyberport project, arguing it was a government venture from the outset. That may sound like sour grapes in a tough letting market, but the project remains a carbuncle for a firm seeking to position itself as a stripped-down pure telecoms play.
According to CLSA, CyberWorks' revenue is expected to fall 5.4 per cent this year to HK$20.8 billion as competition erodes its core line rental market - fixed lines are tipped to shrink 6.3 per cent, following a 6 per cent fall last year.
Touted growth areas include its broadband Internet business - where customers have risen this year to 370,000 from 311,000 - and a systems integration arm where CyberWorks hopes to provide firms a one-stop-shop for all their communications needs.
Like Cable & Wireless HKT in the mid-1990s, CyberWorks touts China as its next big thing. For now, its mainland income comes largely from voice services, but competition and tariff deregulation is eroding the business.
A systems integration joint venture with China Petroleum and Chemical has been launched, and a directory business with China Unicom - although neither is a big revenue contributor.
Such businesses seem unlikely to excite the (still) technology-enthralled Mr Li. Ironically, having exited the mobile telephone business, CyberWorks is ideally positioned to grab market share in the fast-emerging wireless broadband sector run on the 802.11 standard.
Hedging his bets, Mr Li offered a 50-50 chance that this touted disruptive technology will supplant 3G as the leading access technology for wireless data. "If it does not take off and we decide to go back to a cellular base wireless data network, we can do so."
That may sound like a man who wants to have his cake and eat it but an executive at an SAR mobile firm reckons a less debt-encumbered CyberWorks could be back in the market.
"After 18 months, [CyberWorks] could come back and buy not just one, but perhaps two or three mobile operators," he said.
He added: "Of course, that would depend on whether Richard still owns [CyberWorks]."
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Published in the South China Morning Post. Copyright © 2002. All rights reserved.
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