Hong Kong Calling

There is an almost perfect yet absurd symmetry to the latest attempt to seize control of PCCW, the former Hong Kong Telecom. It was once the largest listed entity on the Hong Kong stock exchange but has slowly been reduced to second-tier status since falling under the ownership of Richard Li, the youngest son of Li Ka-shing, Hong Kong’s most powerful businessman.

In the latest episode of the PCCW saga, Nelson Wong Kam-fu, the inventor of the Chinese telephone paging system, announced a HK$68 billion ($7.8bn) bid for PCCW on Tuesday 18 Sept. This compares with the HK$279.6 billion ($36bn) that Li Junior paid for the company in 2000.

Like Nelson Wong, Richard Li made his bid by scrambling together a host of loans and a plan to raise the balance of the cash from an expanded flotation of the target company’s shares. And like Wong, he arrived at the negotiating table claiming support of the authorities in Beijing and armed with a small band of blue chip advisors who, in Li’s case, successfully led the deal to a conclusion.

Unlike Richard Li, Nelson Wong is not the son of Hong Kong’s most powerful businessman. On the contrary he is a largely self-made man who earned decent money out of his first big company, Star Paging Communications, and subsequently faltered as paging went out of fashion and he tried his hand at mobile telephony on the Chinese mainland, then dabbled in bio-tech and then came up with a credit card security system. Since then he has turned his attention to energy financing and it is his Smart Rich Energy Finance Company that has become the vehicle for

the current bid.

The bid is being treated with considerable skepticism, not least by PCCW, which on September 19 issued a statement saying that, “The company wishes to clarify that Mr. Wong's statements are unsolicited”. It added that PCCW had not received any credible acquisition proposal from Wong or his advisers.

There is also some doubt about whether Wong’s alleged advisers are acting on his behalf; neither the Australian-controlled Macquarie Bank nor the French based investment bank Societe Generale have confirmed their participation in this deal.

However there is no disguising Li’s recent desire to sell the company. In June 2006 he was in talks to sell the company to two consortia, one led by Macquarie and the other by the American private equity company TPG-Newbridge, the Asian investment arm of Texas Pacific Group. These negotiations largely faltered due to the opposition of the Chinese state-controlled but publicly listed China Netcom Group, which acquired 20 per cent of PCCW in January 2005. It appears that Netcom was miffed that the takeover talks were underway without its knowledge and this fueled its general disquiet about the proposals.

Once these deals fell through, Richard Li turned to the investment banker Francis Leung, his father’s longtime advisor and business associate, to buy his 23.6 per cent stake in PCCW through a consortium he was putting together with the help of Li Senior. But there were few takers for Leung’s plan, aside from the Spanish-based Telefonica group.

Li Junior suffered a bout of extreme embarrassment when his father’s involvement in the deal became known and ultimately the plan was vetoed by the minority shareholders in the Singapore listed Pacific Century Regional Developments which held the stake Richard Li was proposing to sell in a complex transaction which would have allowed him to exit both companies.

Leung, incidentally, put a HK$9.2 billion price tag on his bid, which values the whole company at something like almost half the price now supposedly on the table. Nevertheless the bid is roughly twice PCCW’s current market capitalization, which stands at around HK$33 billion.

While there is furious activity on the corporate front most analysts question whether there is a real strategy for moving PCCW forward. It once held Hong Kong’s fixed-line telephone monopoly but this has now disappeared. It dabbled disastrously in an ambitious internet television venture that was subsequently closed down and replaced by a far more successful telephone cable-carried network that mainly broadcasts programs made by US companies. Having sold its lucrative mobile telephone network to Australia’s Telstra to raise cash, PCCW has bought a smaller network to get back in the business just as competition is peaking and rates of return are low.

Meanwhile almost all its valuable property portfolio has been hived off into a separately listed vehicle, Pacific Century Premium Developments.

PCCW’s share price continues to flounder and by most measures it is the worst performing stock in the blue chip Hang Seng Index. From a position at the top of the Hong Kong market capitalization league PCCW now ranks somewhere around the 90th mark.

Meanwhile and, rather ominously, there is the statement from Wong declaring that he has support from Beijing for his bid. When Li targeted Hongkong Telecom one of the first things he did was to ensure that the Chinese government was on board. The Hong Kong Special Administrative Region is supposed to enjoy a high degree of autonomy from the government in Beijing, especially in business matters, the affairs of PCCW tell another story.

Following the debacle of the three bids in the last two years Li declared his commitment to developing the company and indicated that he was not looking for a buyer. This declaration is being treated with almost as much skepticism as Wong’s bid. Strange things happen at this company so it is anyone’s guess what exactly is in store for PCCW.