PCCW to repay debts early to fund future acquisitions?

17 Jul 2003

Hong Kong conglomerate Pacific Century Cyberworks (PCCW) [NYSE: PCW] yesterday discounted 9.3% from the price of 715 million shares, raising HKD3.15 billion (USD403 million) to repay bank loans due in 2008 and significantly lower net debt. Last week CEO Richard Li also raised an additional USD500 million from selling bonds, and the moves have been interpreted by the analyst community that the company is preparing itself to embark on an expansion programme which could see it buying up either ailing domestic mobile operators or boosting its presence in the international broadband fixed wireless access market. PCCW owns PCCW-HKT Telephone (formerly Hongkong Telecom), the dominant fixed line operator in Hong Kong. At the end of June 2002 it operated 3.35 million direct exchange lines in its domestic market, down from 3.7 million a year earlier. Of the total, 1.94 million lines were residential and 1.42 million were business connections, giving PCCW-HKT a market share of 87%. However, by the end of the year its market share had slipped to 82% as new entrants Hutchison Global Communications, Wharf T&T and others successfully wooed customers away. The attrition has forced PCCW to explore fresh revenue streams, with small domestic cellcos such as People’s Telephone and the loss-making Sunday Communications now the centre of takeover speculation. Analysts are in general agreement that PCCW could be looking to pay its debt early to curry favour with its banks and creditors prior to borrowing additional cash to fund an expansion programme.

PCCW has not escaped the misery of the global telecoms slump. Its share price plummeted by 96% from its 2000 high and the company found itself labouring under debts of HKD38.2 billion (USD4.9 billion) by the end of 2001. It subsequently embarked on a cost-cutting scheme to reduce debt and focus on its core telecommunications operations, and in December 2001 made 506 job cuts from its workforce of around 14,000; the following March a second round of redundancies took place. In July 2002 the company sold its 40% stake in Regional Wireless Company to its partner in the venture, Telstra, for USD6.14 million; Regional Wireless Company owns Hong Kong-based cellular operator CSL which at the time had around a million subscribers. The move ended PCCW’s involvement with the domestic wireless sector and contributed to the company’s USD232 million loss for the first half of 2002. Although PCCW agreed not to re-enter the Hong Kong cellular market for 18 months, the agreement expires this year. Elsewhere, PCCW has recently purchased 13 broadband wireless licences in the UK and has been ramping up its presence in mainland China.

Hong Kong