The bluffing and counter-bluffing is over and the hands are revealed. No one should be surprised that Hong Kong banker Francis Leung’s US$5.2 billion purported bid for local telecom operator PCCW is in fact a careful orchestration of control for the utility by master conductor Li Ka-shing (KS Li) on behalf of mainland Chinese telecom carrier China Network Communications Group (China Netcom).
As predicted in these pages (see HK telecommunications carrier PCCW: Wrong connections, August 2006) Francis Leung has been fronting for Li senior in ensuring that three critical objectives are realized. The first is that Richard Li, KS Li’s youngest son, is extricated from his PCCW nightmare; second, that control of the company now rests with China Netcom; and third, that none of the parties involved with the carve-up was required to make an offer for all of the PCCW shares. It looks like mission accomplished on all three fronts.
To achieve this legerdemain, Leung and company have enlisted the help of Spanish telecom carrier Telefónica Internacional. In November, Leung revealed that his consortium to purchase the 22.65% stake in PCCW from parent Singapore-listed Pacific Century Regional Developments (PCRD) would comprise Telefónica purchasing 8% and two charities of Li Ka-shing purchasing a combined stake of 12%. Leung will purchase the balance of 2.65%. The price of the purchase is HK$6 per share.
Curiously, however, Telefónica might receive a discount of up to 10% on its purchase price per share depending upon the performance of PCCW shares for a certain period within 10 months after Telefónica has paid for the shares. There is no explanation for this arrangement but it would seem that the Spaniards needed a little arm-twisting to seal the deal.
China Netcom, which already holds almost 20% of PCCW and which had already prevented two foreign private equity groups from making a higher offer for PCCW, promptly announced an agreement with Telefónica whereby their combined holdings will be pooled into a special purpose vehicle. The SPV will hold 27.94% of PCCW and will become its single largest holder, effectively handing de facto control of PCCW to China Netcom and ensuring that PCCW will not fall into foreign hands.
Critical to the transaction is the fact that Leung and the KS Li charities have not been deemed to be acting in concert with China Netcom and Telefónica. If the Securities and Futures Commission (SFC) in Hong Kong, the takeover regulator, had deemed the group a concert party, then Leung, China Netcom and company would be obliged to bid for all PCCW shares, something beleaguered PCCW shareholders would love and the concert party would not. According to the official PCCW announcement, the SFC opined that there was not sufficient evidence to deem these parties to be acting in concert to warrant forcing a mandatory offer. This despite the fact that Telefónica is a party to agreements with both the Leung/KS Li alliance and China Netcom.
There are two losers from the outcome of this transaction. The first is of course PCCW’s minority shareholders, who have been denied the right to an offer for their shares twice within the space of a few months. First, by China Netcom because of political sensitivities, and now by the fancy footwork of one of Hong Kong’s smartest bankers and best traders.
The second loser is Hong Kong, which has yet again shown itself to be a place where political connections and influence in Beijing count for more than business acumen and honest broking. It is hard to miss Beijing’s fingerprints on the SFC’s neck over their concert party deliberations.
The only party to come out of this with credibility intact appears to be the Singapore Stock Exchange. It announced in November that Richard Li, the controlling shareholder of PCRD, had failed to satisfy it that he was sufficiently independent of the transaction to permit him to vote on the deal. The fact that the fate of the entire transaction now rests in the hands of minority shareholders of PCRD provides the flimsiest of escape clauses for PCCW shareholders. This is a deal that should be consigned to the dustbin. That it will probably succeed says much about what is wrong with Hong Kong.
