Jack So, the deputy chairman of PCCW yesterday (June 14) denied the company was under investigation by the SFC for insider trading in relation to its acquisition of Sunday Communications. "I'm not aware of any enquiries into our company," he said.
On Tuesday FinanceAsia.com reported that the SFC was investigating suspicious trading patterns into the shares of Sunday in the run up to the deal announcement on Monday. Other irregularities surrounded the purchase of HK$72 million ($7.3 million) of shares by PCCW's chairman Richard Li in the month prior to the announcement of the major acquisition.
PCCW's group CFO Alex Arena said negotiations between PCCW and the shareholders of Sunday had been "relatively quick" and that only he and So were involved in any discussions.
The news came as PCCW revealed the terms of its offer for Sunday. The company has agreed to buy a combined 59.87% stake in Sunday from the company's two largest shareholders at a price of HK$0.65 a share. This is a 22.6% premium to the closing price on Sunday before it was suspended. The total consideration being paid is HK$1.16 billion ($149 million).
The deal is likely to be completed on June 22 after various representations and warranties have been met. At that stage, the acquisition will trigger a mandatory general offer at the same price for the rest of the shares that PCCW does not own. The total cost for acquiring 100% of the company will be just below HK$2 billion ($256 million).
PCCW will pay cash for the company and has no need for further finance to fund the deal. According to Arena, "PCCW has cash and cash drawing ability of $3 billion so this deal represents less than 10%" of the company's liquidity.
Explaining the rationale behind the deal, So noted that it would meet investors' expectations of PCCW's re-entry into the Hong Kong mobile market from which it has been absent since June 2002. The deal will allow the company to deliver more services to new customers and get synergies across the so-called quadruple play of fixed, mobile, internet and content.
Perhaps most importantly, the deal can be viewed in the context of the wishes of the Chinese parties in the deal. Huawei Technologies owns 8% of Sunday and is using the company as the flagship user of its new high speed 3G equipment. Having a larger customer in a combined Sunday/PCCW is clearly beneficial.
PCCW has its own Chinese strategic shareholder in China Netcom. This company is keen for a mobile license in the Mainland, where it currently only runs a fixed line system. By gaining access to Sunday and its 3G abilities through PCCW, China Netcom can up its chances of getting a mobile license in the forthcoming telecom review expected in China in a few months.
Such a move is not surprising given how attractive a mainland mobile license would be. China's biggest fixed-line operator, China Telecom, was at one stage considering buying an Indonesian mobile operator just so that it could say to its regulator that it had mobile experience and so improve its chances of getting a coveted license.
So pointed to the China angle of the deal as a clear rationale behind it. "[With the acquisition of Sunday] we are better placed to work as the preferred partner of China Netcom in the mobile development in mainland China, as we have been promised," he said.
He further damped speculation that this deal was the first of a number of acquisitions in the Hong Kong mobile market that PCCW was considering. "We will take this one step first," he said, before qualifying that "the management is always alert to market opportunities."
Citigroup is advising PCCW on the acquisition and mandatory general offer. Sunday has so far not appointed any financial adviser, although the company is forming a committee to decide on the appointment of an independent financial adviser for the minority shareholders. It is unclear who is providing advice to Sunday's major shareholders, Distacom and Townhill.
Addendum (15/9/05): Two months after this article originally appeared, the SFC clarified that Richard Li was not under investigation. PCCW received a letter from Alan Linning, Executive Director of Enforcement at the SFC stating that it was not conducting an investigation into Richard Li or anyone else associated with PCCW in relation to the Sunday transaction.
