PCCW arrives too late at the M&A table

By Tony Brown

PCCW Chairman Richard Li must have been out of the business pages for at least six months, so it was only a matter of time before he came back to dominate the headlines once again.

Already well known in the region for being the son of billionaire Li Ka-shing, head of the Hutchison Whampoa investment group, Li has become one of the highest-profile investors in the region since his Pacific Century CyberWorks (PCCW) outfit paid $28 billion to Cable & Wireless to assume control of Hong Kong Telecom in 2000.

After a period of relative quiet, Li is back in the news, with a grand plan to consolidate the media and telecoms assets of PCCW into one firm, HKT Group Holdings, of which he would sell 45 per cent to new investors and possibly move toward an IPO in a couple of years.

PCCW is inviting proposals from investors interested in the 45 per cent stake, with local reports saying the deal has already drawn interest from international players, including several mainland companies, though private-equity players are reportedly shying away from the deal because it does not given them a controlling stake.

The proposed deal has already created a storm of publicity, given that Li’s previous attempt to sell a stake in PCCW two years ago created a furor and ended in abject failure.

In 2006, Li tried to sell PCCW to private-equity firms TPG-Newbridge and Macquarie Bank, only to have the deal blocked by China Netcom, which owns 20 per cent of PCCW. Netcom nixed the deal after its mainland-government backers refused to countenance the sale of PCCW to foreign owners, and Netcom was upset that Li had invited bids for PCCW without obtaining its consent.

The bad blood has almost certainly cost Li the chance to get a slice of any media or telecoms opportunities that emerge in the mainland any time soon, though PCCW says the latest deal has received the approval of Netcom’s directors.

The misery of the TPG-Newbridge/Macquarie Bank deal’s failure was compounded by the rejection by shareholders of an alternative deal, in which Li would have sold his 23 per cent stake in PCCW to long-time family associate Francis Leung for $1.17 billion.

The new deal on the table does not involve the dilution of Li’s stake in PCCW, and he has already told local press that he has “no intention” of reducing his stake in the firm.

The thinking behind the newly proposed deal seems to be that selling the stake in HKT would “unlock the value” of the firm’s assets and generate a cash pile with which PCCW could compete for any telecoms assets that became available in the international market, most notably in Asia Pacific and the Middle East.

Li has already said that the global credit crunch has reduced the prices being asked for global telecoms assets, making M&A activity more feasible for the firm.

But despite Li’s optimism, it looks like PCCW might be trying to hunt big game armed with only a pistol if it tries to take on the big boys in the cutthroat international M&A market, given that most analysts say that the 45 per cent stake in HKT would raise only about $3.7 billion.

Considering that Indian operator Reliance is having to stump up about $45 billion for South African firm MTN Group, PCCW will have to shop in the cut-price stores, not the high-class boutiques, if it wants to play the M&A game.

To be fair, PCCW does bring a lot more to the M&A table than some of the pure private-equity investors, whose cold, hard cash has limited appeal to some regional telcos on the block, which crave the expertise and brand power that an alliance with Vodafone or Hutchison could bring.

PCCW has one of the best quadruple-play offerings on the planet, with 2.6 million fixed-line telephony subs, 1.23 million broadband subs, 1.07 million mobile subs and 882,000 customers signed up to its world-class IPTV service.

The firm has built a magnificent network platform and is expert at getting the most out of converging communications networks – traits that other operators around the region would be eager to get their hands on.

However, although PCCW does have a great story to tell, it does not bring to the table the kind of market scale that other telcos, such as Vodafone, Hutchison and SingTel, can. That is where PCCW’s lack of focus on developing any kind of serious regional M&A strategy in the years just after the 2000 acquisition of HKT has really come to haunt the company.

The $28 billion megainvestment in HKT, followed by the dotcom crash and 90 per cent drop in PCCW’s share price, took the financial wind out of the company and rendered it a mere spectator as regional rivals SingTel, Telekom Malaysia and Indian operator Bharti Airtel were busy getting in on the ground floor of the regional mobile market.

PCCW has created a truly impressive product in its home country, but the limited Hong Kong market can never give the firm the kind of growth it needs to be a serious player, especially since the golden doors to mainland China treasures have remained firmly closed.

As a result, PCCW is going to have to be extremely creative if it wants to be a serious M&A player, and it might have to team up with a bigger force in the market if it wants to share some of the few spoils that are left globally.