China Network to Buy Stake in PCCW for $1 Billion (Update1)
Jan. 20 (Bloomberg) -- China Network Communications Group Corp., the nation's second-biggest fixed-line phone company, agreed to pay HK$7.9 billion ($1 billion) for 20 percent of Hong Kong's dominant operator PCCW Ltd., gaining a partner for its expansion in south China.
The Beijing-based phone company plans to buy 1.34 billion PCCW shares at HK$5.90 each, a 25.5 percent premium to the closing price yesterday, the two companies said in a joint statement today. PCCW, controlled by Richard Li, son of Asia's richest businessman Li Ka-shing, plans to invest HK$5 billion of the proceeds on ventures with Netcom Group in China.
Li, 38, would gain access to the world's biggest phone market by subscribers as sales slump at home as well as raise funds to pare PCCW's $3.8 billion of debt. Investors including Liu Yang question the benefits for Netcom Group, which gains a partner to help it expand in southern provinces dominated by its bigger rival, China Telecom Corp.
``For Richard Li, he's so happy: He got cash selling the stake at a premium and has a way into China,'' said Liu, who helps manage $1.8 billion at Atlantis Investment Management in Hong Kong. ``I don't know why China Netcom made such a move buying a 20 percent stake. With this cash, it could do so much business in China.''
Market Opening
China wants to demonstrate to the world that it is opening its telecommunications market, which had total sales of $70 billion in 2004, according to Beijing-based market research firm BDA China Ltd. So far only AT&T Corp., which bought a minority stake in a mobile operator in Shanghai's Pudong district, has entered the Chinese market, according to BDA.
``PCCW's entry into China might help the government burnish its telecom credentials,'' said Duncan Clark, BDA's managing director. ``Investors have had a difficult time getting access to significant stakes in Chinese phone companies. Clearly a Hong Kong company would be a friendly operator and would be more malleable.''
Shares of PCCW, which have fallen 13 percent in the past 12 months, were suspended in Hong Kong today. PCCW was the fourth worst-performing telecommunications stock in the past year, according to the MSCI AC Asia Pacific Telecommunication Services Index. The stock last traded at HK$4.70 yesterday.
``It's hard to say if it's the right price,'' said Allan Ng, an analyst at BOC International (Holdings) Ltd. ``With two-thirds of the proceeds to be reinvested into China, it's uncertain whether PCCW will secure a good price when acquiring businesses in China in the future.''
Competition
PCCW, which accumulated HK$141.8 billion of losses in the past four years, sold assets and fired workers to return to profit as its share of the fixed-line market fell. Its fixed-line phone unit's share of the market fell to 69 percent in Hong Kong at the end of September, compared with 74.6 percent a year earlier.
PCCW is losing customers to rivals such as Hutchison Global Communications Ltd. and City Telecom (H.K.) Ltd. that offer lower prices. City Telecom and I-Cable Communications Ltd. are cutting prices using new technology including the voice over Internet Protocol system.
PCCW has lost more than 90 percent of its value since its peak in 2000, when Li used his Web venture to take over Hong Kong's former phone monopoly for $28 billion in a stock- and debt- financed deal that coincided with a global tumble in phone and Internet stocks.
Opportunities
Netcom Group has fixed-line operations in northern China except in the regions currently serviced by its unit China Netcom Group Corp. (Hong Kong). It also owns fiber-optic networks and international gateway systems and a 72 percent stake of Hong Kong- listed Netcom, which owns Asia Netcom Corp., a submarine cable operator in Asia Pacific.
PCCW and Netcom Group will set up a business development committee to explore investment opportunities in China including possible acquisitions. The committee will be equally represented by officials from both sides, the statement said.
Netcom Group will buy new shares issued by PCCW and that will reduce Richard Li's 32.6 percent stake in the company. The Chinese telecom operator will send three officials to sit on PCCW's board, one of whom will be a deputy chairman, the statement said.
International Ambition
``Netcom doesn't need to buy a stake in PCCW in order to get the technical expertise,'' BOC's Ng said. ``My reading is that it will satisfy the international ambition of Netcom, which always wants to distinguish itself from other Chinese carriers with its overseas operations.''
Goldman Sachs Group Inc. advised Netcom Group and JPMorgan Chase & Co. worked for PCCW. The companies will hold a press conference in Hong Kong at 3:00 p.m. local time.
China opened the market to foreign investors in 2002, under terms of its entry into the World Trade Organization, allowing foreign investors to take up to 25 percent stakes in ventures. Operators say a government requirement that foreigners buy a $250 million license before starting services is a barrier to investment, BDA's Clark said.
China Netcom Group will be named as the exclusive fixed-line telecommunications partner in China for the 2008 Olympic Games in Beijing, according to Hong Kong-listed Netcom's share sale document last year.
The Hong Kong traded unit provides fixed-line and high-speed Internet services in the cities of Beijing and Tianjin, and the provinces of Hebei, Henan, Shandong and Liaoning, and is expanding in Shanghai and Guangdong province in the nation's south.
``To Netcom, PCCW seems to be the best partner offering the telecom expertise they need for expansion in south China,'' said Bryan Yip, who helps advise on $3 billion of stocks at Standard Life Investments in Hong Kong including shares of PCCW.
To contact the reporter on this story:
Cathy Chan in Hong Kong
or kchan14@bloomberg.net
To contact the editor responsible for this story:
Bill Austin at
or billaustin@bloomberg.net
Last Updated: January 20, 2005 01:18 EST
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