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PCCW: HK's best connection
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February 29, 2000: 10:24 a.m. ET
Internet investor offers $38B for HKT to speed transformation into Internet powerhouse
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LONDON (CNNfn) - Pacific Century CyberWorks (PCCW) clinched a startling victory Tuesday to forge Asia's largest-ever corporate takeover with an agreement to buy Cable & Wireless HKT, Hong Kong's main telecom operator, from its London-based parent for as much as $38 billion.
The deal marks a strategic leap by PCCW, which started life just 10 months ago as an Internet investment company. It has pursued an aggressive acquisition policy in pursuit of its stated goal of becoming the region's dominant Internet access and content provider. But its broadband Internet service is months away from commercial launch.
"At this point, PCCW is just a concept. When they merge with HKT they will get some real assets: fixed-line, mobile and a broadband network," Kim Eng Securities analyst Alfred Li told Reuters.
PCCW has cut a swathe through Asia's Internet sector since its creation by Richard Li, the son of Hong Kong's best-known tycoon, Li Ka-shing. Its stock has soared as investors have bought into its strategy of developing broadband services delivered by satellite and building up franchised content deals.
Creating a giant
The deal will combine PCCW, a company with just HK$283.6 million ($36.4 million) in revenues last year, most of them inherited through an acquisition, with a 129-year-old company with sales of HK$32.41 billion. It will turn PCCW into a communications giant with a fiber-optic network covering 70 percent of Hong Kong, 3.3 million paying fixed line customers, 1 million mobile customers and nearly 500,000 Internet subscribers.
A series of Web-based acquisitions across the region have built up a portfolio for PCCW. The company aims to become the region's dominant Web content and access provider and announced plans last month for a 50:50 joint venture with Internet investor CMGI (CMGI: Research, Estimates) to roll out the U.S. firm's content across Asia. "PCCW has grown into a Softbank-like vehicle that offers one-stop shop exposure to the Internet in Asia," said Matei Mihalca, sector analyst at Merrill Lynch in Hong Kong, in a note to clients.
Analysts said HKT would provide PCCW with the enhanced cash flow and distribution clout to meet its broadband ambitions and sustain the share price, which has funded its buying spree.
Mihalca estimated that Li's company generated net earnings of HK$68 million last year and is headed for a HK$524 million loss in 2000, even before the HKT acquisition. PCCW has taken out a $12 billion bridging loan to fund the cash element of the deal.
The enlarged company will be renamed PCCW-HKT, and with a market value of around $70 billion, rank third among the region's telecom players behind Japanese cellular firm NTT DoCoMo and its parent, Nippon Telephone & Telegraph.
Analysts also said the deal moves PCCW closer to its greater goal of leveraging its connections to secure access to the huge Chinese market. "This deal helps them to build up local credibility in the Hong Kong telecom market as a first step to entering the Chinese market," said Agatha Poon, Asian telecom analyst at consultant the Yankee Group in Boston.
Li signaled his interest in HKT in early February, derailing merger talks between HKT and Singapore Telecom. SingTel, as the state-controlled firm is known, was reported to have offered similar terms to PCCW and brought in Rupert Murdoch's News Corp. as a partner in a bid to counter political opposition to HKT's acquisition by an overseas company.
Analysts have speculated that Li's close connections with the Chinese leadership have helped smooth his victory.
News Corp. said its offer to invest up to $1 billion in SingTel has now lapsed. Its entry had surprised many observers because of its close links to Li, from which it bought Star TV, Asia's largest satellite TV network, in 1993.
Cash and stock offer
PCCW has tendered an all-stock bid of 1.1 of its own shares for each HKT share worth $38.1 billion, alongside an alternate $35.9 billion offer of 0.71 shares and HK$7.23 in cash. C&W HKT will also pay its shareholders a special dividend amounting to a total of $700 million before the deal completes.
Cable & Wireless is opting for PCCW's lower, cash and stock offer for its 54 percent stake in HKT, and will own 20.9 percent of the enlarged company and have two of the 15 board seats. CMGI said Tuesday that it had entered a $500 million share swap with Cable & Wireless in return for part of the U.K. firm's holding in PCCW.
The acceptance triggers an automatic extension of the offer to all HKT shareholders. Under Hong Kong takeover rules, any bid for more than 35 percent of a company must be extended to all shareholders. HKT's other major shareholder is state-controlled China Telecom with a 10 percent stake. A $38 billion bid for C&W's 54 percent stake implies a price of about $70 billion for the whole of HKT.
The accepted offer represents a 38 percent premium to where HKT shares were trading before the offer was announced.
Cable & Wireless shares slump
HKT shares remained suspended on Tuesday at HK$25.95, valuing the company at HK$314.5 billion ($40.4 billion). PCCW shares also were suspended at HK$22.15, capitalizing the company at HK$225.5 billion.
Cable & Wireless (CW-) shares tumbled 6 percent after the announcement, with investors expressing disappointment at the final sale price and its exposure to PCCW's untested strategy.
 Chief executive Graham Wallace has transformed the company since he took over last year, selling its most-valuable assets at what some observers view as knockdown prices. One2One, Britain's fourth-largest cellular operator, was sold to Deutsche Telekom (FDTE) for $10 billion and its cable unit, Cable & Wireless Communications, was picked up by NTL and France Telecom (PFTE) for $8 billion. 
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