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Hong Kong phone giant gets static
By Gary LaMoshi
HONG KONG -
When the going gets tough, according to an American
credo, the tough go shopping. Even though Pacific
Century Cyberworks (PCCW) chairman Richard Li didn't
stay long enough to get his degree at Stanford, the
first US university with an adjacent namesake shopping
mall, he apparently picked up that bit of wisdom.
Once Asia's Internet cover boy with a grand
vision of beaming his Network of the World programs by
satellite to remote computers beyond the reach of cable
television and telephone cables and furiously swapping
stock for shares in other bright ideas, Li has
transformed PCCW into a stodgy telephone utility, thanks
to its purchase of Hong Kong Telecom (HKT) from
Britain's Cable & Wireless (C&W) three years ago
(see AOL's Asian cousin, October 10,
2002).
Considering the fate of other Internet
visionaries and their companies, there's no shame in
that. Boy wonder Li did a great service to his investors
when he grasped a real, cash-generating asset while
there was still air left in their bubble stock.
Unfortunately, the HK$250 billion (US$32
billion) HKT purchase put a big hole in PCCW's balance
sheet, and by the time the deal closed in August 2000,
running the printing press to issue new shares for fresh
cash was no longer in the cards. PCCW got Hong Kong's
former monopoly phone company and its shrinking
prospects, plus US$12 billion in debt, and C&W got a
lot of hissing PCCW shares.
Reality
bites
Aside from its political problem as an
agent of the former colonial power in handed-over Hong
Kong, C&W realized that HKT's best days were behind
it. The end of its international calling monopoly
sparked a free-for-all that left Hong Kong with the
lowest long-distance rates on the planet, eliminating
HKT's most reliable source of hefty profits. Fixed-line
interlopers were pressuring its local telephone
business, which was most attractive as an entry point to
the long-distance cash machine.
The mobile-phone
business in Hong Kong has always been a street fight -
literally, with scores of attractive young people in
matching polo shirts urging pedestrians to switch
services - and number portability (users can keep the
same mobile-phone number when switching carriers) set
blood flowing into the gutters along Queen's Road. HKT's
CSL subsidiary held a niche with premium service at
prices to match for corporate clients, making it the
most profitable player on the block. But HKT had been
forced to create a rival cut-rate service that competed
with CSL to build consumer market share. Overall,
C&W was happy to unload HKT, even though it knew it
would be getting a lot of overvalued paper as part of
the bargain.
Over the past three years, PCCW-HKT
exhibited the behavior you'd expect from a responsible,
heavily indebted ex-telephone monopoly. It paid down its
loans, sold off assets, cut thousands of jobs, and,
unthinkably, ended HKT's dividend. Most painful, it
unloaded CSL last year, which finished PCCW as a major
mobile player with international reach. PCCW has reduced
its mountain of debt to US$4.3 billion and banked US$1.2
billion in cash, gaining respect among bankers, but its
long-term prospects are even less exciting than those of
HKT when it was part of C&W.
Taking
stock
Investors have, accordingly, hung up on
PCCW stock. The company engineered a one-for-five
reverse split of its shares to spare them the indignity
of trading under HK$1, as they did last October. But
such wizardry can't hide the real damage. At Wednesday's
close of HK$6.05 (HK$1.21 without the split), PCCW
shares were off more than 95 percent from their early
2000 high. If you invested $1,000 (HK, US, Singapore or
Zambian kwacha) in PCCW shares at their apex, you'd have
$46 now.
PCCW shares had retreated to HK$15.40
by the time the HKT deal closed. Investors that got
$1,000 worth of PCCW at that time have $79 to show for
HKT stock valued at HK$17.35 before the merger reared it
head three Valentine's Days ago. That's a 92 percent
loss.
The biggest loser from PCCW's market
collapse was C&W. Since the widows and orphans (and
index-following fund managers) who owned HKT's stock
read the fine print in the transaction, C&W got less
cash and more PCCW stock than initially hoped, winding
up with 21 percent of the company. C&W has sold off
some of its stake, greasing PCCW's slippery slope in the
markets, but still holds about 14 percent of the
company. The value of that stake has plummeted from more
than US$6.2 billion to less than US$500 million.
C&W has had plenty of other problems during
the global telecom collapse. HKT was a crown jewel in
its collection of phone companies in former British
colonies. It sold some assets into the stiff winds
against the sector, and struggled unsuccessfully to find
a strategy, ironic for the first truly global phone
company in an age of telecom globalization. Shares are
down 96 percent from their March 2000 high, and new
chairman Richard Lapthorne is under pressure to do
something.
Enter the vulture
After
obscuration in the face of press reports, PCCW admitted
on Monday that it tried to acquire C&W but was
abandoning its interest. There's something distasteful
about PCCW trying to acquire a company it helped put in
dire straits, akin to proposing to your ex-sister-in-law
to get back the divorce settlement she inherited from
your ex-wife. Of course, good taste has no place in
business, especially in Hong Kong.
Failing to
tell the truth about its US$3.9 billion C&W overture
when Hong Kong market regulators asked brings PCCW's
taste further into question, as well as its intellectual
acuity, since the company came clean to London
regulators hours after its fib to the Hong Kong
investing public.
But those issues, important as
they are, pale in comparison to one question: why would
PCCW want C&W? Sure, C&W has a US$3.5 billion
cash pile, but a pending United Kingdom tax bill and
restructuring charges will reduce that hoard
substantially. PCCW made some noise about C&W
fitting into its "global fixed line strategy". Finding
synergies between local businesses operating in
different parts of the world sounds more far-fetched
than profitably beaming movies via satellite to personal
computers in dark corners of India beyond the reach of
cable wallahs.
With debts exceeding its current
market capitalization by nearly US$1 billion, PCCW is in
no position to be buying lunch, let alone a stumbling
company at a 140 percent premium to its market value.
Moody's Investor Services slapped a credit watch on PCCW
when London's Financial Times reported the Hong Kong
company's intensified interest in C&W, and the
spread on PCCW bonds increased 21 percent in one trading
session.
The episode with C&W raises serious
questions about judgment at the highest levels of PCCW
management, starting with chairman Li. The most positive
spin on the company's dueling statements over the past
week is that management changed its mind repeatedly.
When you're talking about spending $4 billion you
haven't got, investors would expect more decisiveness,
as well as some discernible clarity of purpose.
One analyst warned of a "Richard Li discount" on
PCCW shares. The C&W flirtation indicates that
instead of focusing of the challenges of his profitable
(except for all that debt) but boring local telecom
shop, Li longs for his days as a global deal maker with
his mug plastered on the magazine covers with the lie
about his Stanford degree inside, and will put investors
at risk to recapture those glory days.
Years
ago, when Washington, DC, mayor Marion Barry faced
criminal charges based on a police videotape showing him
smoking crack cocaine and pressure to resign his office
ahead of a pending election, professional do-gooder
Jesse Jackson suggested that he'd offer himself as a
candidate to rescue the US capital from this
embarrassing situation. Mayor Barry dismissed the notion
that Jackson would want to tackle the headaches of
managing the city, clucking, "Jesse don't want to run
nuthin' but his mouth."
Propositioning C&W
indicates Li has little interest in running PCCW
sensibly.
(©2003 Asia Times Online Co, Ltd. All
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