After Selling PCCW, in which industry will RICHARD LI find his future?
|Our Correspondent||Jul 12, 2006|
With Richard Li's HK$9.2 billion sale of 23 percent of the assets of Hong Kong's major telecommunications company to a local banker, the frantic local Chinese press and its better-behaved western counterparts are now turning to what Li, the son of tycoon Li Ka-shing, is going to do next. But he has already moved on. And deep in the details of his departure from PCCW there is probably no better example in Hong Kong of the government’s incestuous relationship with its ruling oligarchs.
Inadvertently or not, that relationship has turned Li and his flailing telecommunications empire into a fledgling property company with major development interests in both Hong Kong and China. While a certain amount of jousting continues over the Chinese government's objections to international bidders for PCCW's fixed-line, wireless, broadband and media assets, it is clear that Li is out of the telecommunications game and profitably into property.
The story had its genesis in 1999 when the government, seeking to log onto the dotcom boom, selected what was then Pacific Century Cyberworks, owned by Li, without competitive bidding to develop a HK$15.6 billion commercial, retail and residential project at the extreme west end of Hong Kong, in Pok Fu Lam. Cyberport, as it was called, was designed to compete with such grandiose projects as former Malaysia Prime Minister Mahathir Mohammad's Multimedia Super Corridor, a 750 sq. km-zone south of Kuala Lumpur to which he hoped to lure the world's major information technology companies. Other such hi-tech zones were developed in Hyderabad and Taiwan, among others, as Asia sought to emulate Silicon Valley in California.
Cyberport was just one of many projects dreamed up by the government of Tung Chee-hwa, then Hong Kong's Chief Executive, in the wake of the handover from Colonial Britain to China. The development was to include a digital media center, IT and telecommunications facilities, exchange programs, a wireless development center, a conference and exhibition center in an effort to lure such companies as Microsoft and Oracle into making Hong Kong a world technological power. Cyberport has been mired in controversy ever since, since very little of it has ever housed anything remotely having to do with its original purpose.
To be sure, PCCW did its job. It agreed to build a 990,000 square foot office complex with a 300,000-square-foot retail mall and a 173 room luxury hotel to be managed by Le Meridien hotel chain. These were all handed over to the government at no cost, as stipulated in the agreement with PCCW and the government.
In return, as has been widely reported, Li received land free for the construction of 4.5 million square feet of luxury residential housing and is entitled to 64.5 percent of the profits from the units, of which about 2,000 have been sold so far. The final units are to be offered for sale this year and next, with total sales proceeds estimated at HK$35 to HK$40 billion and at a profit estimated as high as HK$5 billion.
The proceeds, however, do not go to PCCW. Richard Li spun out Pacific Century Premium Developments, or PCPD in 2004 as a property company through a backdoor listing via what previously had been Dong Fang Gas Co. Ltd. Li is listed as chairman and executive director. PCPD receives the revenues from the Cyberport's residential housing sales and also retained right of first refusal to redevelop PCCW's 60 existing telephone exchange sites, which long ago were granted by private treaty to PCCW's predecessor, Hong Kong Telecom.
Telephone exchanges were a necessary part of the telephone companies of the past, routing calls from homes and offices. Following the digitalization of the industry, many of these sites are far larger than necessary to house new computerized exchange equipment and can be redeveloped. Many of the exchange sites are in prime locations.
Since it was set up two years ago, PCPD has been doing handsomely. As stipulated by the British colonial government long ago, land ownership is prohibited. Although leases are granted through 2047 – when they theoretically revert to the Chinese government -- the SAR government owns it all – except the land under Saint John's Cathedral in Central. When the government decides property must be reclaimed and rehabilitated, a continuing process, it compensates the previous occupants and puts the land up for auction, as it is doing now with the last remaining inhabitants of Li Chit Street, the acclaimed Wedding Card street of small shops and printing establishments in Hong Kong's Wan Chai area that is being demolished amid continuing controversy.
But the telephone exchange sites will remain in Richard Li's hands as a result of the spinoff of PCPD from PCCW in 2004. The sites, the right to which could be worth as much as HK$1 billion, will probably be dealt with through direct company-to-government negotiations rather than by the government reclaiming them and auctioning them to the highest bidder, as is being done company-to-government negotiations, according to guidelines now being prepared by the government.
PCPD has already developed one Sheung Wan telephone exchange site to the west of the Central district into a residential site housing 150 flats. PCCW injected the site into PCPD when the company was set up, so it is 100 percent owned by the property developer and not the telephone company.
PCPD continues to expand into China as well. It has completed a residential, office and retail complex called Pacific Century Place in Beijing. In January, PCPD bought another site next to its existing Pacific Century Place costing 510 million yuan and zoned for 46,300 square meters. It is conveniently located to use the adjacent development's existing facilities, meaning more of the project is commercially viable for sale.
Li's property development company has also signed a memorandum of understanding for a tourism site at the southern tip of Hainan Island although it will release no further details. And, in a deal with China Netcom, it is working on a combined office and high-end residential project that is expected to total about 90,000 square meters above one of China Netcom's telephone exchange sites in Beijing. Sales could begin in 2008.
PCCW, on the other hand, has been seriously ailing virtually since 2000, when it was still a tiny dotcom company with about 1,000 employees that swallowed an elephant – what was then Hong Kong Telecom, with 14,000 employees – for US$28.2 billion, beating out Singapore Telecommunications. It was widely believed at the time that the Chinese government disapproved of a Singapore company owning Hong Kong’s telephone system, even as today the Chinese government is believed to disapprove of the sale of PCCW’s assets to an Australian or American company.
Li's purchase, financed with PCCW stock and US$11 billion in loans from four banks including the state-owned Bank of China, was almost perfectly timed -- a few months before the bursting of the dotcom bubble. The venerable UK-owned Cable & Wireless, anxious to get rid of Hong Kong Telecom before government regulators deregulated and wiped out its monopoly and concerned about rising Chinese government influence in post-handover Hong Kong, took a HK$5 billion stake in PCCW.
Li took PCCW public through a backdoor listing in 2001, with its shares rising as high as HK$120 (adjusted for subsequent consolidation) from its immediate offer price of HK$15.80. But ventures with other IT companies as US Internet incubator CMGI and GigaMedia of Taiwan collapsed. Worse, the company's monopoly on fixed-line telecommunications continued to be eroded by government regulators. Younger, nimbler companies came into the market, particularly in cellular. PCCW's Network of the World (NOW), venture, designed as an Internet entertainment company, ultimately failed although NOW Broadband is a successful cable television operation in Hong Kong. It was forced to write off billions of Hong Kong dollars in losses on the entire value of Reach, a disastrous undersea cable operation with Australia's Telstra Corporation.
By 2003, PCCW's stock had fallen 96 percent from its 2000 peak, beset as it was with huge debt, growing competition and the troubled Reach joint venture. It was the worst-performing blue chip on the Hong Kong Stock Exchange in 2002 and 2003, the share price at one point veering close to HK$5 adjusted. Cable & Wireless's US$5 billion stake in PCCW at the time of Li's purchase was reduced to US$1.9 billion in 2003 when they cashed in their shares. In the meantime, Cyberport, as lots of newspapers have pointed out, remains little more than a real estate project. The project's website has proudly announced that some 30 "incubatees" have been produced, in areas including games animation and "commix," e-commerce, music and "edu/info-tainment." But while some companies merely relocated from other parts of Hong Kong to take advantage of low rents, very little of the IT business has ever materialized. Despite selling 20 percent of the company to the state-owned fixed-line operator China Netcom for HK$7.9 billion, selling off its remaining stake in Singapore cellphone operator Mobile One for HK$590 million, disposing of its interest in a Japanese gaming company of HK$367 million and selling its high-rise PCCW Tower in Quarry Bay for HK$2.4 billion, PCCW still had consolidated net debt of HK$19.78 billion at the end of 2005.
PCCW has since recovered somewhat, with the sale of Li's stake to Hong Kong banker Francis Leung at HK$6 per share, particularly because the reputation for quality and reliability that it earned by decades of service as Hong Kong Telecom remains high. PCCW has also been able to piggyback the marketing of its popular Netvigator broadband and other services onto its fixed-line operations. Li himself turned over his job as CEO in 2003 although he remained chairman and executive director for now. Some local media reports have him buying into other exotic information technology ventures with the money he takes out of PCCW. Others say Li has a trader mentality, much like his legendary father. But given the assets controlled by PCPD, it is more probable that Richard Li will follow Li Ka-shing into the Hong Kong property oligarchy. Ends