PCCW FOR SALE - SOLD!

C O N F I D E N T I A L SECTION 01 OF 03 HONG KONG 002851 SIPDIS NOFORN SIPDIS STATE FOR EAP/CM AND EB/CIP/BA ROBRIEN USDOC FOR ITA/EAP LEVINE, ITA/FCS/OIO/EAP ZARIT TREASURY FOR OASIA/KOEPKE STATE PLEASE PASS TO USTR/STRATFORD E.O. 12958: DECL: 07/12/2016 TAGS: ECON EFIN ECPS PGOV PREL CH HK SUBJECT: PCCW FOR SALE - SOLD! REF: HONG KONG 2607 Classified By: EP Section Chief Simon Schuchat; Reasons: 1.4 (b/d) ¶1. (C) Summary: On July 10, 2006, Pacific Century Cable & Wireless (PCCW) Chairman Richard Li announced that he would sell his 23 percent stake in PCCW to veteran investment banker and former Li Ka-shing (Hong Kong tycoon and Richard Li's father) ally Francis Leung. PCCW is Hong Kong's dominant telecommunications firm. Reflecting Beijing's tacit approval of the deal, China Network Communications Group Corporation (China Netcom),which had previously opposed the proposed sale of PCCW's core telecom and media assets, released a statement in support of the deal. Despite Leung's protestations otherwise, most telecom sector observers, including information technology (IT) and telecom sector Legislative Council (Legco) representative Sin Chung Kai, see clearly the hand of Li Ka-shing behind the sale. The Commerce, Industry and Technology Bureau (CITB) and the Office of the Telecommunications Authority (OFTA) have also asserted their jurisdiction over the transaction. The general consensus among telecom industry analysts is that Leung's purchase of Li's shares almost certainly means that the proposed sale of PCCW's telecom and media assets to Australian investment bank Macquarie or U.S. based Newbridge Capital (reftel) will not go through. The stock market reacted negatively to the news, as shares of PCCW fell by 9.9 percent. Comment: We are by no means convinced that this is the final resolution of this transaction. There are enough outstanding questions about Leung's financing, and it is not certain that Macquarie and or Newbridge will give up. End Summary and Comment. Keeping it in the family? -------------- ¶2. (SBU) On July 10, 2006, PCCW Chairman Richard Li announced that he was selling his 23 percent stake in PCCW, which he controls through his Singapore-based company Pacific Century Regional Developments (PCRD),to veteran investment banker Francis Leung's wholly owned company Fiorlatte Limited for HKD9.16 billion (USD1.17 billion). This amount is far below the offers of HKD55-57 billion that reportedly made by Australia's Macquarie Bank and U.S. based investment group Newbridge Capital for the purchase of PCCW's core telecom and media assets. Li announced in an open letter to PCCW minority shareholders (see text in paragraph 9) that he would personally pay HKD1.38 billion to minority shareholders, this being the difference between his selling price to Leung and the original share price of HKD4.8 per share before Macquarie's offer to purchase PCCW's assets became publicly known. According to various media sources, Li subsequently confirmed that he was lending HKD6.4 billion to Leung to fund 70 percent of the share purchase. Li further stated that on receipt of the first payment from Leung, which is due by December 2006, he would resign as chairman and step down from the company's board. ¶3. (C) Leung is well known for his role in listing many large state-owned mainland Chinese firms on the Hong Kong stock market in the 1990's. More importantly, he also has close ties with Richard Li's father, well-known Hong Kong tycoon Li Ka-shing. Leung strongly denied accusations that he was actually acting on Li Ka-shing's behalf, pointing out that he was acting only in his own commercial interest and that PCCW has great potential to develop in the mainland Chinese market. (Note: Richard Li, Li Ka-shing's second son, is reportedly on very poor terms with his father, and there were rumors that Richard Li refused to sell his shares to his father. End note.) Leung was instrumental in China Netcom's initial public offering in Hong Kong in 2002 and still maintains a close relationship with the company, an important factor should he attempt to expand PCCW's operations into the mainland Chinese market. China Netcom had previously opposed the proposed sale of PCCW's core telecom and media assets, but released a statement on July 10 supporting the sale of shares to Leung. HKG and Legco Reactions -------------- ¶4. (SBU) CITB said that any changes to the voting control of PCCW Media Limited would require the Broadcasting Authority's approval to ensure that a "qualified person," or someone who does not have any conflict of interests and holds an official HONG KONG 00002851 002 OF 003 management role in the company, is in control of the company. Commenting on the announcement, OFTA reiterated its authority to monitor the situation closely and investigate the deal under section 7P of the Telecommunications Ordinance, which provides for competition safeguards in the telecom sector. ¶5. (C) Democratic Party legislator Sin Chung Kai, who represents the IT/Telecom sector, told Econoff he suspected that Francis Leung did not have the cash to complete the purchase and wondered whether Li Ka-shing was actually financing the deal. If that is so, Sin continued, then Leung needs to be open about his funding source so that OFTA can pursue its competition investigation. As for the possible sale of PCCW assets after the share transfer, Sin opined that Richard Li's motives behind the share sale was to gather "an enormous amount" of cash for an unknown purchase, perhaps in the media sector. ¶6. (C) Sin expressed concern over political issues interfering with what should have been a purely commercial transaction. Foreign ownership of Hong Kong's telecom infrastructure in of itself is not a problem, but Beijing's perceived interference with the deal could have a negative impact on Hong Kong's image as a free and open economy. Sin dismissed the concerns of Legco counterparts like Emily Lau, who had called for a specific meeting to discuss the possibility of greater mainland Chinese involvement in, or even ownership of, PCCW's telecom assets. The issue is not any possible mainland attempts at wire-tapping, affirmed Sin - it is avoiding damage to Hong Kong's reputation and economy. Analyst Reactions -------------- ¶7. (SBU) Beyond a general consensus that Leung's purchase of Li's shares almost certainly means that neither Australian investment bank Macquarie or U.S. based Newbridge Capital's offers to purchase PCCW's telecom assets would not go through (reftel),analysts were divided in their view of the sale. JP Morgan analysts believed that Francis Leung's buyout of PCCW shares would be positive to long term investors due to Leung's excellent relationship with China Netcom and with mainland authorities overall. Nomura Securities gave a "neutral" rating to PCCW after the announcement, pointing out that minority shareholders would essentially be left out in the cold by the deal. A Deutsche Bank analyst told Econoff that even though the deal was now acceptable to Beijing and would go through, PCCW's basic operational risks had not changed. Markets not excited -------------- ¶8. (U) The Hong Kong stock market reacted negatively to the announcement of the transaction, with PCCW shares falling HKD5.55 per share to HKD5.00 per share, a drop of 9.9 percent compared with their value when Macquarie's interest first became public. Richard Li's Letter to PCCW Shareholders -------------- ¶9. (U) Begin text: An Open Letter To All PCCW Shareholders In Hong Kong Dear Shareholders, During recent weeks, you will no doubt have read in the newspapers about proposals being put forward and opinions being expressed over the future of PCCW. The Board's and my primary focus, as always, has been maximizing value for all shareholders. I am pleased that, in recent weeks, this value has been recognized by the expressions of interest received for PCCW's assets, and in an offer made by Francis Leung to purchase PCRD's entire 22.66% stake in PCCW. The Board of Directors of PCRD, of which I own 75%, has accepted this offer. By selling my stake I am also able to realize some value for PCCW minority shareholders. To do this, I have set up a plan to take the entire premium from my share of the proceeds and distribute it to minority shareholders of PCCW. This premium represents the difference between the price of HK%6.00 HONG KONG 00002851 003 OF 003 realized by PCRD and the PCCW share price of HKD4.80 as of market close on Friday 16 June 2006, before the first announcement of an expression of interest. This payment is conditional on receipt of the first payment from Mr. Leung, which amounts to approximately 30% of the consideration and is expected to be received no later than 14th December this year, and the consent of China Netcom. I expect my payment, totaling about HKD1.38 billion, to equal between approximately 33 and 38 cents per applicable PCCW share. When the first payment on the transaction is received I will resign as Chairman of PCCW and leave the Board. Until then I remain 100% committed to PCCW. PCCW has built an impressive and valuable business in Hong Kong over the past few years. We have successfully paid down debt and built a healthy and competitive business. We have established in Hong Kong a unique combination of fixed and mobile telephony, broadband internet and the world's leading IPTV business. With Mr. Leung as a major shareholder, the management team will get the help and support of an experienced and professional investor to help take the business forward. Yours faithfully, Richard Li Chairman Pacific Century Group Some Questions for Mr. Li: * What is the current situation of the PCCW sale process? The PCCW board will continue to review the situation, indeed it is our duty to do so. * How does this payment work? Are you really giving money away? Conditional on Mr. Leung making the first payment, yes, I am. It is a way of getting money to minority holders. I can sell shares for HKD6.00, but am giving everything over HKD4.80, which is the price as of market close on Friday 16 June 2006, before the first announcement of an expression of interest, to the minority shareholders. That works out at around HKD1.38 billion, or between 33-38 cents for each minority share. * Why don't you give this to Netcom as well? I believe China Netcom will agree with what I am proposing. * Do you think that the relationship with Netcom is over for PCCW? Not at all. I think the opportunity we identified in that partnership is still very logical. Francis Leung as PCCW's new major shareholder will be able to help realize that strong business partnership. Indeed I believe that Francis Leung already has the support of China Netcom. End Text. Sakaue