THE FIGHT FOR PCCW

C O N F I D E N T I A L SECTION 01 OF 03 HONG KONG 002609

SIPDIS

NOFORN
SIPDIS

STATE FOR EAP/CM AND EB/CIP/BA ROBRIEN
USDOC FOR NTIA

E.O. 12958: DECL: 06/23/2016
TAGS: ECON EFIN PGOV PREL CH HK
SUBJECT: THE FIGHT FOR PCCW

Classified By: EP Section Chief Simon Schuchat; Reasons: 1.4 (b/d)


1. (C) Summary: PCCW Limited (formerly known as Pacific
Century CyberWorks Limited) is considering bids from three
foreign suitors for its core telecommunications and media
assets. Mainland Chinese telecommunications company China
Network Communications Group Corporation (China Netcom),
which holds a 20% stake in PCCW, subsequently stated its
opposition to any changes in PCCW's assets or shareholding
structures. Beyond these public statements, a reliable and
well-informed source has also told us that Beijing is pulling
out all the stops to keep foreigners from purchasing the PCCW
assets.


2. (C) While there may be high level efforts to shape the
sale, Hong Kong Commerce, Industry, and Technology Bureau
(CITB) Principal Assistant Secretary Tony Li said that
neither the Hong Kong Government (HKG) nor the mainland
Chinese have a "veto" over it. He noted that a competition
review was possible but would depend on the specific
provisions of the final deal. Telecom industry analysts in
Hong Kong pointed out that PCCW's value as a potential entry
point into the mainland telecommunications and media market
may already have been compromised by the negative reaction
from China Netcom and possible further reactions from the
mainland Chinese Government. End Summary.

PCCW "Selling Out?"
--------------


3. (SBU) On Tuesday, June 20, media sources indicated that a
consortium led by Australian investment bank Macquarie Bank
had offered to purchase PCCW Limited's telecommunications and
media assets -- just the assets, rather than a share interest
-- for a reported USD 7.3 billion. U.S. private equity firm
Texas Pacific Group and its regionally focused subsidiary
Newbridge Capital Inc. then reportedly offered a slightly
higher figure. Although PCCW subsequently denied the
accuracy of both reported bid figures, most industry analysts
agreed that the purchase would be worth several billion
dollars and that the purchase price would likely include the
adoption of PCCW's 2.5 billion USD debt burden.


4. (SBU) On June 23, a third consortium comprised of Ashmore
Investment Management, Spinnaker Capital Group, and
Clearwater Capital also indicated interest in making an offer
for PCCW's assets. This group had previously purchased China
Netcom's undersea cable operation (Asia Netcom) for USD 402
million. PCCW refuted earlier reports that its board of
directors would make a decision on the purchase bids within
ten days, stating that it was under no time limit to accept
or reject the purchase offers.

Opposition from China Netcom, Beijing?
--------------


5. (SBU) In a statement released through the Xinhua News
Agency, China Netcom stated its opposition to any changes in
ownership of PCCW's assets or shares because the company's
assets should be, "owned and managed by Hong Kong people."
China Netcom's spokesperson claimed that the company had not
received any advance notice of the possible transaction and
said that the sale of PCCW's assets would destabilize Hong
Kong's recovering economy.


6. (C) Beijing's resistance to the attempted acquisitions is
more than rhetorical. We have heard from a reliable and well
informed source that Beijing is pulling out all the stops to
keep foreigners from purchasing the PCCW assets, applying
pressure behind the scenes. There may also be a
Beijing-inspired effort to find Hong Kong investors to bid
against the foreign interests.


7. (SBU) PCCW noted in a subsequent press release that it
would only need to gain China Netcom's consent for
transactions involving "voting interests," or shares, of the
company. In transactions involving the disposal of physical
assets, PCCW is only required to inform China Netcom of the
transaction details before the deal is carried out. Various
industry analysts noted that China Netcom has three logical
courses of action left to it:

1) Dispose of its shares;

2) Take measures to block the sale; or

3) Make a counter-bid.

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According to mainland telecommunications expert Lu Tingjie of
the Beijing University of Posts and Telecommunications, China
Netcom will have to consult with the mainland State-owned
Assets Supervision and Administration Commission (Sasac)
before taking any action related to the PCCW situation.

HKG Comments
--------------


8. (C) CITB Principal Assistant Secretary Tony Li told us
that the HKG and the mainland Chinese government do not have
any way to "veto" the purchase of PCCW's assets by a foreign
company. Li said that the HKG does not object to foreign
ownership of telecommunication infrastructure; for example,
Hong Kong based CSL Mobile is completely owned by Australian
telecommunications firm Telstra. In any case, it would be
inappropriate for Hong Kong regulators to be swayed by
political considerations, even if they come from Beijing. Li
concluded that Beijing disapproval of the situation could
only affect the PCCW sale in a political sense, perhaps by
implying a difficult road for any future mainland business
projects attempted by both PCCW Chairman Richard Li and his
father, Li Ka-Shing.


9. (C) Depending on how the PCCW deal is structured, however,
the HKG could conduct a competition review of the deal. The
Office of the Telecommunications Authority (OFTA) has the
power to block mergers and acquisition if the actions involve
changes in carrier licenses and are judged to have a
substantially adverse affect on competition in the
telecommunications sector.

Telecom Analysts React
--------------


10. (C) Credit Suisse Telecom analyst Jeffrey Tan speculated
that the high caliber of the potential buyers would continue
to draw greater interest and predicted that more potential
suitors for PCCW would emerge. Their primary interest is
gaining entry into the nascent Chinese integrated internet
services/media market, an area in which PCCW holds a high
level of expertise. Tan said that one possible way to
overcome resistance from China Netcom and the mainland
Chinese government would be for foreign entities to entice
China Netcom to join in on the purchase. They could also
bring in yet another operator, such as Singtel, that would be
more politically acceptable to the mainland authorities. In
any case, continued Tan, Richard Li has much to gain if share
values for PCCW rise in reaction to the speculation. Li
might even be working with his friends to bid up the share
prices, although such a move would be like "playing with
fire" and could even affect his father's business interests,
said Tan.


11. (C) Hong Kong University Telecommunications Research
Project (TRP) Director John Ure commented that Hong Kong's
telecom market is saturated and offers little potential for
future growth, so PCCW's real value to purchasers is its link
with China and its ability to leverage its Cable TV service
based on broadband internet connections (Broadband TV),a
concept that is practically unique to Hong Kong at this
stage. Ure said that PCCW's Broadband TV offerings are its
"crown jewel," and observed that PCCW's Broadband TV
specialist Paul Berryman is in great demand as a consultant
to media companies in the region. Ure opined that Richard Li
has wanted to extricate himself from the telecommunications
business for quite some time and return to his "roots" as a
property developer. If PCCW successfully sells all of its
telecommunications and media assets, the company would once
again be a property/real estate company - this time, though,
with a great deal of cash with which to pursue other
ventures.

COMMENT
--------------


12. (C) Comment: For Beijing, this possible deal is a matter
of national security involving key strategic infrastructure
in Hong Kong. For Hong Kong, this single deal would be
equivalent to approximately 20% of the total foreign direct
investment in the territory in 2005 and a symbol of Hong
Kong's openness to international business, a feature of the
city that the HKG tirelessly promotes. Hong Kong independent
legislator Albert Cheng also stated that any overt attempt to
stop foreign investors buying the assets could hurt the
territory's image as an open city for international

HONG KONG 00002609 003 OF 003


investment. No matter what happens, it seems likely that the
final result will have consequences for security and
sovereignty issues in Hong Kong. End Comment.
Cunningham