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

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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

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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