PCCW Stake Sale Rejected by PCRD Minority Shareholders

At an extraordinary general meeting yesterday, about three in four minority shareholders of PCRD voted against the proposed HK$9.16 billion (US$1.18 billion) sale, even though the offer valued PCCW at HK$6.00 a share—a near 20% premium to the last-traded price of HK$5.05. Reasons for rejecting the deal, according to minority shareholders who spoke to the media, included a lack of clarity as to what the future will hold for PCRD. PCCW chairman Richard Li, who controls PCRD, did not attend the meeting. He was barred from voting, because his father, the tycoon Li Ka-shing, was involved in financing the Leung consortium's proposed purchase.

Outlook and Implications

• Another Failed Bid: PCRD's 22.7% stake in PCCW is sought by a consortium put together by Hong Kong financier Francis Leung, members of which include the Spanish telecommunications giant, Telefónica, and two foundations run by billionaire Li Ka-shing, father of PCCW chairman Richard Li (see Hong Kong: 13 November 2006: Telefónica, Li Ka-shing to Join Consortium for PCCW Stake). The Leung-led bid follows Richard Li's failure to exit PCCW after both Australia's Macquarie Bank and U.S. buyout firm TPG-Newbridge expressed interest in its telecoms and media assets. Richard Li terminated talks with both groups in July this year after China Netcom, which holds 20% in PCCW, expressed opposition to their offers. Richard Li therefore agreed to sell his 22.7% interest in PCCW to Francis Leung. However, he later told the Hong Kong newspaper Ming Pao that he wanted PCRD's minority shareholders to scuttle the deal, on learning that his father was helping to finance the Leung consortium's purchase. Although Richard Li did not give the reason for this, his intention to escape from his father's shadow could be one of the possible explanations.
• Implications for Bidders: The deal would have enabled Telefónica and its regional partner China Netcom to become PCCW's largest shareholder, with a combined 28% stake. The Spanish telecoms giant, having acquired 5% of China Netcom, hopes to strengthen its presence in the high-growth Asia markets. China Netcom, the mainland's second-largest fixed-line operator, aims to further expand its foothold beyond the mainland market. PCCW's expertise and experience of growing a successful IP TV business could be particularly helpful to Netcom, at a time when the fixed-line operator has just started its own IP TV deployment on the mainland. The rejection to the bid also prevents the potential market domination of the Hong Kong's telecoms market by Li Ka-shing, who is the chairman of Hutchison Whampoa, which controls mobile operator Hutchison Telecommunications International Limited. His proposed entry into PCCW could eventually create a dominant telco player, with strong footholds in both fixed-line and mobile segments.
• Future Remains Uncertain: Following the rejection of the Leung consortium's bid, the future of PCCW now appears uncertain, as Richard Li has yet to make clear his intentions regarding PCCW. Having intended to exit from PCCW, he now may have to continue managing the company until new exit opportunities emerge. His shifting attitudes towards the deal over the past few months—agreeing to sell PCCW and then backtracking after he became aware of his father's involvement —have called his future credibility and commitment to PCCW and PCRD shareholders into question. PCRD shareholders have indeed urged Richard Li to "work very hard" for the company. With its dominance over the territory's fixed-line market and promising IP TV services, PCCW may still present a lucrative investment opportunity to other potential investors. Nevertheless, it would not be a surprise if China Netcom became the ultimate winner, eventually gaining control over PCCW.