Friday, June 23, 2006

PCCW's sale may be only a camouflage

The most breaking news in town these days is Tycoon Richard Li Tzar-kai, the biggest shareholder of PCCW, plans to sell the company's telecom assets, including broadband, mobile, wireless and TV services,(see PCCW's annual report here) ,possibly to one of the two private equity funds, one is Australia-based Macquarie Bank, and another is U.S. Newsbridge Capital.

People's attention was suddenly attracted to PCCW's rising share price, and the deal price, reportedly over HK$60 billion; Unfortunately, no one thinks on the other side: why the two private equity funds exposed their interests in PCCW, so early before any decision come? Any specific purpose to publicize it so quickly?

Private equity funds are famous for their deep pocket, and more importantly, beating return. Macquiarie Bank said on their website that the average return was 28 percent for its total portofolio by the end of 2004. Normally, the funds usually buy part or the whole stake in a company before restructuring it and selling out in three to five years.

So let's now guess the plan the two private equity funds are making on the PCCW deal right now. Maybe they see the trend for Hong Kong telecom operators to merge together in the future ten years, and make the assumption that PCCW, the biggest fixed line operator, will stay at last. They will have two options then: one is to list the assets on the stock market, possible, but difficult as it is hard to expect the situation of the stock market at that time: another option is to sell it to another party. In Hong Kong, except for Li's family, the only possibly buyers with enough capital are the mainland telecom companies including China Netcom. (China Mobile, which already bought a small HK operator, raised the example for further buying out from the four rich state-owned tele companies)

The plan sounds good, but unfortunately, China Netcom, the already second biggest telecom operator with 20 percent stake, couldn't agree on selling assets which will charge it more in the future. Off the record, I believe it has the assignment from the Ministry of Information Industry to do something in Hong Kong, the reason it doesn't want to make money from any share deals. Its spokeman also said it never plans to make money from the PCCW's stake.

So both Macquarie Bank and Newsbridge are facing a deal that will upset future buyers, which is unwise to do. Plus, HK$60 billion is not a small number to both parties. Newsbridge's total managed assets in the world is only US$3.2 billion, or nearly HK$ 25 billion, accounting for less than a half of the reported price on PCCW's assets, according to its website.(Macquarie's asset number couldn't be found)

Then, the only result I could get is that nothing will happen, except for the rising up stock price of PCCW. (Or maybe some secret deal between PCCW and China Netcom)

(Update on June 24 for some grammar mistake)

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