Author: Anja Helk
Acquirer: Pacific Century CyberWorks
Type of deal: LBO of Hong Kong Telekom
Amount: $37 billion (later adjusted to $28 billion)
Date of announcement: February 29 2000
Advisers for PCCW: Bank of China International, CSFB, MSDW, UBS Warburg
Advisers for Cable & Wireless: Merrill Lynch, Greenhill & Co
Adviser to HKT: Jardine Fleming (now Chase)
Independent financial adviser to HKT board committee: ING Barings
In February 2000 Pacific Century CyberWorks (PCCW) left the biggest imprint on corporate history ever made by an internet company. Even the AOL-Warner deal fades in comparison to the takeover of Hong Kong’s crown jewel and 127-year cash cow, Hong Kong Telekom (HKT), by a nine-month old internet start-up. This was the largest-ever M&A transaction in Asia, including Japan.
It all started in January 2000 when news broke that talks between HKT’s majority owner – UK company Cable & Wireless – and Singaporean Telecom company Singtel were stagnating. Their disagreement, initially over price expectations, widened into a political discussion and it became a “well-established rumour” that the government of the People’s Republic would not sanction a takeover by Singtel. But it would support an alternative – meaning more local – bidder.
When UBS Warburg detected that its client had a chance of doing a deal, it lost no time approaching PCCW, and found that it too was considering a move. By February 11, UBS and the Bank of China International (BOCI) had been hired as PCCW’s advisers.
PCCW then quickly placed an equity offering of 3.35 billion new shares, led by BNP Peregrine, which raised HK$7.8 billion (US$1 billion) on February 24. And after securing a bridge loan facility of $12 billion three days later, the company announced a $38 billion conditional offer to merge with HKT, if accepted by Cable & Wireless, who owned 54% of HKT.
The merger finally went through on August 17 2000, after C&W shareholders approved it in June. The shareholders appreciated the bigger cash element than the one offered by Singtel. They were offered a share alternative of 1.1 new PCCW shares for each HKT share, or a combined alternative of 0.7116 new PCCW shares and $0.929 in cash per HKT share. The latter was taken up by 95% of the shareholders – PCCW’s share price had dipped below the level where the share-only option would have been worth more.
The cash paid out by PCCW amounted to $11.3 billion.
“Apart from the attractive cash offer, it was crucial for the success of the merger that it had been conducted via a scheme of arrangements and not by a general offer under the takeover code,” says Vincent Shen, managing director at the BOCI Asia. “This took out the hostility of the offer since under a scheme the merger becomes subject to agreement from the board of HKT. And it was also easier to get approval for a 100% takeover of HKT.” A scheme needs to be approved by only 75% of the target’s shareholders, compared with a 90% vote of acceptance in a general offer.
Lenders preferred a situation in which HKT becomes fully owned by PCCW because HKT’s assets and operations generate the cashflow that guarantees the service of interests and repayment of the loan. “However, the scheme did have the disadvantage of taking five month to completion, much longer than a general offer, in which another bidder could have appeared,” points out Shen.
All in all PCCW put an attractive offer on the table. “And it was a viable undertaking,” adds Grace Fung Oei, managing director at Hong Kong corporate finance at UBS Warburg. “PCCW’s shares were very strong and there was much liquidity in the banking market so the bridge loan could be arranged very easily. In short, the timing of the merger was fantastic from every angle.”
PCCW owner and founder Richard Li, son of Hong Kong tycoon Li Ka-shing, could not agree more. He gets the tag of shrewdest kid in town for making use of his paper money to buy real, old-economy assets while the time was there to do so.
His paper wealth didn’t last for much longer. In April, after the Nasdaq crash, PCCW’s share price dropped from the February high of HK$26 to HK$14. Last month, PCCW reached a new low of HK$4.20. The shares have been under pressure since September when C&W’s holding period ran out. It promptly sold 4.9% in PCCW, causing its price to plummet by 16%. C&W still holds 15% of PCCW, and another lock-up period for half of this stake is coming to an end in February.
But Fung Oei puts the deal into context. “Yes, the market sentiment has changed,” she says, “but that does not affect the viability of the business.” PCCW will deliver its content through HKT, which has a market share of 99% of local residential and 92% of business lines, as well as a 23% coverage of a mobile market of 4 million customers. “PCCW is now perfectly positioned to take control of the new and old economy applications in Hong Kong and beyond,” says Fung Oei.
Also well-positioned were the advisers to the merger parties. That’s in monetary terms – fees amounted to $130 million – but also in terms of league table entries. “This was such a huge deal that you had to be in it in order to appear in the tables at all,” says Kalpana Desai, managing director of mergers and acquisitions at Merrill Lynch in Hong Kong.
So it happened that indeed all the major banks had their names on the merger (apart from Goldman Sachs which advised Singtel), even if they only joined two weeks before the announcement, as did Credit Suisse First Boston, or even longer after the merger, as did Morgan Stanley Dean Witter.
MSDW wasn’t present at any of the merger negotiations and neither did it appear in any merger-related documents, Euromoney was told. Still, the bank was acknowledged as adviser to PCCW by Thomson Financial Services, which files the league tables, in September. This was early enough for being included in the league tables. Lucky for Morgan Stanley that the more stringent rules for verification, which Thomson introduced in April 2000, only applied to public deals after that date. |
