The press release said it all. "The strategic alliance is subject to a number of preconditions including the successful completion of the acquisition by PCCW of Cable and Wireless HKT."
But looking at the massed ranks of the media, analysts and company executives from Telstra, PCCW and Cable & Wireless HKT, you wouldáhave thought that PCCW and Cable & Wireless HKT had already merged. Far from it.
With PCCW's share price at HK$15.4 on the day before the deal was announced, there is a large chance that PCCW's cash and share offer for C&W HKT will not go through. Nevertheless company executives from HKT and PCCW have been doing their utmost to get the deal done. They agreed on using a scheme of arrangement for the takeover rather than a general offer as the hurdle rate of shareholder acceptances is much lower than with a general offer - 75% of all shareholders under the scheme of arrangement rather than 90% of all minority shareholders under a general offer. Moreover both companies have been aggressively marketing the deal to shareholders, seeking to get their approval.
The Telstra deal is totally dependent on this original takeover actually happening - and under the scheme of arrangement, the takeover is not likely to close until early August 2000. In short, don't hold your breath waiting for the PCCW and Telstra deal to close. As one analyst puts it, "if this saga is an 18-hole golf course, PCCW is only on the second hole."
So is the Telstra announcement little more than a PR ploy to persuade HKT investors to approve PCCW's takeover by showing what PCCW will do with their company once they have approved the takeover? While the answer is undoubtedly yes, analysis of the plans shows they will in all probability create shareholder value. And in the process, analysts predict that it greatly increases the chances of the PCCW C&W HKT acquisition going ahead.
PCCW's and Telstra's plans for spinning off a regional mobile phone company as well as spinning off a huge international IP backbone company look compelling, according to analysts. Value will certainly be created for investors if the markets are still pricing mobile assets as highly as they are now.
According to analysts, the regional mobile company created by Telstra and PCCW is valuing its individual subscribers at $4000 a head - far less than comparative valuations around the globe such as the $7000-$8000 a head that Vodafone paid for Mannesman's individual subscribers. Moreover the IP backbone business will have a strong earnings stream with $1.6 billion in projected revenue when it starts operating. This will be greater than the earnings of Global Crossing, the worlds largest backbone company.
But the real test of this announcement is what is does to PCCW's share price because the announcement was certainly timed to give the price a much needed boost. Telstra is investing in PCCW at a price of HK$23.65 ($3.05) through the purchase of a $1.5 billion convertible note. This is a 54% premium to PCCW's share price of HK$15.4 the day before the Telstra deal was announced. With that kind of commitment, HKT shareholders can take some comfort that PCCW's shares will be backed by a supporter at a much higher level than where they are presently trading.
