It's getting to crunch time in the Cable & Wireless HKT (C&W HKT) bid saga and there is growing talk Singapore Telecommunications (SingTel) and News Corp, possibly in partnership with another global telecoms giant, are preparing an offer in excess of $30 billion - well above the current worth of Pacific Century CyberWorks' (PCCW) recommended offer.
It's all a question of whether SingTel and News Corp have got the nerve to upset Beijing, which is rather obviously behind PCCW's audacious attempt to gain control of C&W HKT. Before SingTel - which is 79% owned by the Singapore government - announced plans to merge with C&W HKT, PCCW's stated growth strategy had not touched on the possibility of acquiring a major telecoms player in the region.
"SingTel dropped out pretty quietly before when Richard Li [PCCW] came in," says Richard Gibbons, an analyst at HSBC.
Originally, the story goes, mainland Chinese officials wanted China Telecom (HK) to make an offer for C&W HKT, but the company, which denies having been approached, declined. Next stop was Richard Li and PCCW. Bank of China International (BOCI), the investment banking arm of Bank of China,áis said to have encouraged PCCW to make a bid and had a hand inágetting Warburg Dillon Readá(WDR) on board as advisers. In addition, Bank of China gave assurances it would provide much of the $12 billion loan PCCW requiredáin order to finance the cash portion of its bid; ultimately Bank of China lent PCCW $2.6 billion - more than any other single bank.
Support from China
A supportive Chinese government could be extremely beneficial for C&W HKT, possibly giving the latter a headstart in the mainland market.áSimilarly, C&W HKT's prospects are pretty bleak without the support of the Chinese government, and parties considering a counterbid will also have to assess the potential impact upon their existing ambitions in the region should they choose to upset Beijing.
In the absence of a counterbid for C&W HKT, it looks likely PCCW's bid will succeed despite the fact its worth has tumbled well below the $38 billion it stood at when announced. There are four extraordinary general meetings at which shareholder approval for the bid will be sought. Of these, only that for Cable & Wireless Plc (C&W), owner of 54% of C&W HKT, has still to be sewn up, though C&W shareholders will have to pay a $100 million fine to PCCW if they should choose to walk away from the deal.
PCCW and Pacific Century Regional Development can both be relied upon to deliver 50% shareholder approval and C&W HKT's 75% approval requirement looks a foregone conclusion with C&W, China Telecom and the Hong Kong government between them owning 73% of C&W HKT's shares.
Scheme of arrangement
The reason the deal needs only 75% shareholder approval from C&W HKT shareholders for the target company to be taken over is that the deal has been dressed up as a scheme of arrangement. A general offer would have required 90% approval from minority shareholders (everyone apart from C&W) in order to become mandatory and pave the way for C&W HKT to be delisted. However, since PCCW's loan is secured on C&W HKT, the banks involved no doubt required PCCW to getáa scheme of arrangement in order to ensure there would not be any C&W HKT minority shareholders in existence after the bid.
Had the C&W HKT board, all of whom would be retained by PCCW, forced a general offer to be made, it seems unlikely PCCW's bid would succeed. Holders of C&W HKT shares do not make natural PCCW shareholders. C&W HKT is a profitable former monopoly trying desperately to defend its market share, while PCCW is a loss-making, gung-ho newcomer aiming to become the dominant broadband internet service provider in Asia.
C&W HKT's share price is typically a function of its earnings or cashflow, while PCCW's appears to be primarily driven by hype - hence analysts' valuations for the stock ranging from around HK$5 a shareáto as high as HK$30. C&W HKT has over the last 12 months traded in the range HK$15.60-HK$27.65, while PCCW, since it came into being just under a year ago, has traded between HK$2.70 and HK$28.50.
Strange bedfellows
Neither business sits very comfortably with the other. Indeed, some might argue whether Li really wanted to make a bid for C&W HKT - his ambitions stretch far beyond Hong Kong. Then again, he might have felt compelled to play ball having last year been given the right to develop Hong Kong's Cyberport, a primarily residential project, by the Hong Kong government. The land and rights toáproperty developments are more usually sold via auction.
Under the terms of the agreed merger proposal, C&W HKT shareholders would receive a special dividend of up to HK$0.45 a share and, from PCCW, either HK$7.19áand 0.7116 PCCW sharesáor zero cash and 1.1 PCCW shares for each C&W HKT share held. At the end of last week, C&W HKT was trading at HK$18.35 and PCCW at HK$14.50. At these levels, the cash and shares offer was worth HK$20.25 per C&W HKT share and the all-paper offer HK$15.95.
The amount of cash on offer is capped at just below $12 billion and minority shareholders will have first refusal on the cash and shares offer, which at present is the more attractive of the two options.áGiven the amount of PCCW shares to be issued, there is likely to be a substantial stock overhang in PCCW-HKT for some time following the deal. C&W, which looks set to own 21% of PCCW-HKT (assuming C&W HKT minority shareholders all opt for the cash and shares offer), has already announced plans to sell part of its holding. In addition, it is hard to see the minority shareholders hanging on to the volatile, dividend-free paper they will be receiving. Such investors bought into a profitable, dividend-paying company and no doubt would like to keep their money in such an entity - SingTel or News Corp, perhaps?
