Global Insight Perspective | |
Significance | PCCW is the latest company to have cancelled its stake sale plan. |
Implications | The value of the business has significantly reduced amid the global financial turmoil. The squeeze in the credit market has also hampered the ability of private-equity firms to borrow money from banks to fund the deal. |
Outlook | PCCW is likely to resume the deal when the market conditions have improved. |
PCCW, which in May announced a plan to reorganise its telecoms, media, and IT solutions businesses under a newly incorporated holding company, HKT Group Holdings Limited (HKT), and had invited proposals from potential investors for the acquisition of up to a 45% equity interest in HKT, said it had received substantial interest and formal proposals from several bidders for the minority stake of HKT, but the recent market downturn had significantly impacted the offers received. Following a board meeting yesterday, the group said its Board of Directors had considered the proposals carefully and unanimously approved the discontinuation of the HKTGH auction process, as the board did not believe the proposals were sufficiently attractive. HKT will therefore remain fully owned by PCCW. PCCW still plans to proceed with its previously announced reorganisation of the businesses under HKT and to draw down on the new HK$23.8-billion loan facility recently obtained by the group.
According to the Wall Street Journal, the bidders submitting offers by Saturday's deadline included Bain Capital Partners, MBK Partners, TPG, Providence Equity Partners, Apax Partners and Macquarie Group. The paper cited sources close to the process as saying that HKT could have achieved an enterprise value of about US$8.5 billion in market conditions around three months ago when PCCW and its adviser UBS started the process. Now the business's value is sinking amid the global financial turmoil. PCCW shares closed at HK$2.80 (US$0.36) Friday (10 October), down 9.7% from Thursday's close and 40% below where they stood at the start of the year. The squeeze in the credit market has also hampered the ability of private-equity firms to borrow money from banks to fund the deal. Bidders were hoping to set up a special-purpose vehicle to buy the 45% stake. As global credit markets have seized up in turmoil, banks have been reluctant to commit the necessary financing. The reluctance has continued even after PCCW said in September it would offer the winning bidder priority in receiving dividends. That arrangement was intended to reassure banks lending to the winning bidder's special-purpose vehicle, but in the current market conditions that had not been sufficient to attract significant financing.
Outlook and Implications
The current financial downturn has resulted in another failed attempt by PCCW chairman Richard Li, the son of Hong Kong billionaire Li Ka-shing, to cash in from a stake sale. His effort to sell a 22.7% holding in PCCW to a consortium, involving Spain's Telefónica and two foundations run by Li Ka-shing, fell through in late 2006 when minority shareholders rejected the US$1.18-billion deal. Earlier in the same year, competing bids from Australia's Macquarie Bank and U.S. buyout firm, TPG-Newbridge, for PCCW's core assets also fell apart after China Netcom, which holds nearly 20% in PCCW, expressed opposition to their offers, amid Beijing's concerns that Hong Kong's main fixed-line carrier would fall into foreign hands. Nevertheless, Global Insight believes the intention of Richard Li to cash-in from the PCCW assets has not changed. As the businesses of PCCW still remain sound, the group can afford to wait until market conditions have improved to resume the sale.
PCCW is the latest company to have been forced to change its business plans under the current market conditions. Last week, the Chinese equipment vendor Huawei announced that it would cancel the sale of its mobile-devices unit for the time being, though the deal might be resumed in the future. TDC, the incumbent operator in Denmark, also announced that it was cancelling the sale of the Hungarian Telephone and Cable Corp. in which it owns a 64.6% stake. With the continuing problems of accessing credit markets and the prospect of a global economic slowdown, many telecoms carriers will inevitably re-assess their business plans. Although many are unlikely to alter their long-term strategic visions, in the short term, operators will be highly cautious on spending. This will result in some delays of investment projects and the sector is also likely to see some degree of temporary slow-down in M&A activities (see World - China - Hungary: 9 October 2008: Financial Turmoil Hits M&A Activity in the Telecoms Industryand World: 7 October 2008: Monthly M&A Review—September).