Court approves PCCW privatisation, but questions linger

Richard Li, chairman of PCCW, scored a victory yesterday when a Hong Kong judge ruling on the scheme of arrangement by which a delisting of the company will be effected found no evidence that a shareholder vote in February was rigged. She therefore ruled that the delisting should proceed. However, the Hong Kong securities watchdog, the Securities and Futures Commission (SFC) was allowed an appeal that will be heard on April 16.

The HK$28.6 billion ($3.7 billion) offer to take PCCW private was tabled in November by Richard Li's Singapore-listed holding company, Pacific Century Regional Developments, and its subsidiary Starvest, together with China Netcom, a wholly owned subsidiary of China United Network Communications Group Company.

PCRD and Starvest are advised by HSBC, which is also providing term loan financing to Starvest to execute the deal. UBS is advising PCCW, while ABN AMRO Asia corporate finance (part of the RBS group) is advising China Netcom. PCCW's board of directors is being advised by NM Rothschild.

Richard, the younger son of Hong Kong tycoon Li Ka-shing, has a chequered history with PCCW, including failed and very public attempts to extract value out of the telecommunications firm in 2006. Shareholders and other market observers, not entirely surprisingly, greeted his latest offer with scepticism.

The first controversy to plague Li this time around was pricing-related. The original price offered to minority shareholders was HK$4.20 per share, which two shareholder advisory firms, ISS and Glass Lewis, recommended shareholders to reject as it did not reflect the fair value of their shares. Li addressed this issue in December by increasing the offer to HK$4.50 a share, representing an enhanced equity value of HK$30.5 billion, and won the support of the said advisory firms.

Then on January 15 the SFC was tipped off anonymously that someone was trying to buy proxies in exchange for PCCW shares and the regulator commenced an inquiry shortly thereafter. PCCW, PCRD and Starvest maintained they had no knowledge of, or part in, any attempt to buy proxies and rig results of the shareholder vote. PCCW also agreed to cooperate with the SFC investigation.

On February 1, shareholder activist David Webb wrote a story on his webb-site.com in which he suggested that insurance agents of Fortis Insurance, the former Pacific Century Insurance, were being given board lots of shares in exchange for signing proxy forms which allowed the proxy-holder to vote in favour of the scheme.

Finally, at a marathon shareholder meeting on February 4, which started at 2pm and ended at 9pm, shareholders gave the privatisation proposal their blessing.

For Li, the February 4 meeting was critical as he needed to secure the support of 75% of the share value as well as 75% of the number of shareholders present at the meeting in person or by proxy. In a further requirement specific to Hong Kong, and intended to protect the rights of minority shareholders, the number of votes cast against the resolution couldn't be more than 10% of the votes received and more than 50% of the number of people physically present at the meeting must support the proposal.

Of the 6.7 billion issued shares, 3.4 billion were deemed eligible to vote on the privatisation as the rest of the shares were held by persons acting in concert with the offeror. A total of 2,256 shareholders holding 1.6 billion shares attended the meeting. In the end 1,404 shareholders, representing 83% of the value of the minority shareholders, voted in favour of the delisting and 859 shareholders, representing 17% of the value, voted against.

On February 24 the Court of First Instance allowed the SFC to be heard during the April 1-2 proceedings for court approval of PCCW's scheme of arrangement and delisting. This is the first time the SFC has been heard in court proceedings. And yesterday the Court announced its decision to allow the delisting to proceed.

The Court noted that the volume of trading in PCCW shares had increased significantly in the run up to the February shareholder meeting but attributed this to the take private announcement. PCRD hired Christopher Howe of Anglo Chinese Corporate Finance to further corroborate this point. Howe's analysis found that once an offer is announced there is a churn of between 70% and 90% of minority shareholders as arbitrage-traders become active in the stock.

The Court analysed the voting pattern of shareholders who attended the February 4 meeting and also tried to ascertain whether the shareholders were registered insurance agents. It found that of the 1,551 share transfers between December 1 and January 31, 495 or around one-third of the transfers were to persons whose names appeared to match those of insurance agents listed in the register of insurance agents. Of the 495 individuals, 347 transferees matched the names of persons listed on the register of insurance agents engaged by Fortis Asia. The High Court also interviewed 95 parties who it felt might have been involved in trying to rig the outcome.

"It must also be borne in mind what is sauce for the goose is sauce for the gander," said Judge Susan Kwan while reading her verdict, commenting that it would be unfair of the Court to disregard shares voted in favour of the scheme much as the court would not disregard shares voted against. She also commented that share splitting [by which lots of shares are sub-divided into smaller lots and distributed with the result that required numerical targets can be achieved] is not illegal in Hong Kong.

Judge Kwan also said that agents of Fortis Asia are shareholders [of PCCW] in every sense of the word and that they voted out of their interest as shareholders.  

However, Hong Kong's Court of Appeal subsequently yesterday admitted an appeal by the SFC on the issue of share splitting, which will be heard on April 16. And it is not clear whether the timetable for the delisting can now go ahead with all these delays. Various parties to the delisting had executed documentation based on receipt of court approval by April 2 and the closing, or long-stop date, was set on this basis and assumed the delisting went through by Aprl 14. The Court approval was only issued yesterday and comes with the news that the deal cannot be completed until April 16.

"The setting of the appeal hearing for April 16 has created a complication in that the timetable through to completion will take us past our long-stop date. The situation is only workable if all relevant parties -- such as the lenders -- consent and the terms and conditions of their consent are acceptable," said PCRD in a statement issued late last night. "No decision has been taken by PCRD at this time as to whether the long-stop date would be extended."