China Netcom in talks to buy 20% stake in PCCW

15 Dec 2004

Hong Kong’s dominant local fixed line carrier PCCW says it has received ‘an expression of interest’ from Chinese state-owned telecoms company China Netcom regarding the possible sale of a 20% stake in the company. At PCCW’s current market valuation the deal, which is expected to be completed through a new share issue, could be worth as much as USD844 million and would make the Chinese company the second largest shareholder in PCCW behind Richard Li; the entrepreneur currently holds a 31.9% stake in the company. Netcom, the smallest of China’s four main telcos, is keen to expand beyond its stronghold in Northern China where its market dominance is being undermined by declining margins and increased competition. It is also looking to build an international presence and sees PCCW as an ideal opportunity to secure a toehold on the strategically important island of Hong Kong. Speculation over a possible tie-up between the two first emerged in May when the Hong Kong incumbent confirmed it was in talks with Netcom over the future of its core fixed line business. PCCW is likely to use the proceeds from any sale to trim its debt which reached USD3.7 billion by mid-2004. If the purchase goes ahead it is likely to be made by Netcom’s state-owned holding company to minimise disruption to the Chinese telco which recently listed in Hong Kong and New York.

However, some analysts warn that the deal could be derailed if Netcom decides it is unwilling to pay Richad Li’s high asking price for the share holding, which represents a significant premium on the company’s current share price. PCCW’s stock closed up 5% yesterday on the news of a possible tie-up, compared to the overall Hong Kong market which rose by just one percentage point. Sources close to the deal have suggested that PCCW wants Netcom to pay through the nose for the 20% stake, as the latter stands to gain a significant strategic influence over the company – which is currently controlled by Mr Li. But Netcom may yet decide it unwise to pay a premium for a minority stake in an operator in a mature market where margins are falling, purely to gain access to that market. The long-running talks are already rumoured to have come close to breaking down on several occasions, and in September both sides took the decision to halt formal talks for at least two weeks following their latest disagreement. If completed, however, the deal would mark the latest in a string of overseas acquisitions by government-controlled Chinese firms. Only last week, one of the country’s leading PC makers, Lenovo Group, signed an agreement to buy IBM’s PC business for USD1.25 billion.

GlobalComms 2.0