Shareholder Approval on PCCW Privatisation Prompts Regulator Investigation 

Officials with the Hong Kong Securities and Futures Commission (HKSFC) took possession of voting records last night, hours after PCCW shareholders approved a US$2.1-billion privatisation proposal for the Hong Kong telecoms company, Dow Jones reports. A buyout group led by PCCW Chairman Richard Li have been seeking to buy the 52% stake in PCCW they do not own, allowing them to take the company off the Hong Kong stock exchange. The proposed deal would pay stockholders HK$4.50 (58 U.S. cents) for each share. The amount is a 64% premium to the share price before the group expressed initial interest in October but is below the stock's rough trading range of HK$5 in recent years.

Of the shareholders who voted on Wednesday, 82% approved the deal. However, allegations by local media and a high-profile shareholder activist that some investors received additional PCCW shares in exchange for supporting the offer have promoted the local stock-market regulators to investigate the voting process. HKSFC officials attended yesterday's shareholder meeting to monitor the voting, then seized voting records afterward and will be making inquiries. PCCW has said that it had no knowledge of any improper share transfers and that it would report any evidence of impropriety to the authorities. The deal will now go before Hong Kong's High Court for approval on 24 February. Regulators or minority shareholders could challenge the buyout proposal then.

Outlook and Implications

• Change of Strategy: PCCW, Hong Kong's dominant fixed-line operator, enjoys a steady cash flow, but offers limited growth prospects. Richard Li, son of Hong Kong billionaire Li Ka-shing, has tried several times to sell all or part of PCCW before trying to take it private amid the current financial-market turmoil. Li had said that there would be no drastic changes to PCCW's business model in the event of a privatisation, although he raised the possibility of an initial public offering when markets improve. Under the current deal, Li and related entities would own about two-thirds of the company. China United Network Communications Group Co., a state-run mainland telecoms company and in the process of acquiring China Network Communications Group, would own the rest.
• Uncertain Fate: Like his previous attempts to divest from PCCW, the current buyout effort has not been a smooth ride for Li. Some minority shareholders and analysts have accused Li of drastically undervaluing PCCW, resulting his buyout group raising their offer from the original HK$4.20 to HK$4.50 a share in December last year (see Hong Kong: 30 December 2008: PCCW Major Shareholders Raises Buyout Offer). Allegations of effort to rig votes in favour the deal have now put the deal under regulatory scrutiny and have again raised uncertainty over the fate of one of Li's major investments. Even if the buyout proposal eventually gains High Court approval, the deal is unlikely to put to rest widespread complaints.