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Sat, Jan 22, 2005 - Page 12 News List

Netcom to buy 20 percent of PCCW

PUZZLING Many analysts reacted coolly to the purchase, saying there was no compelling rationale for it, as both companies are being pressured by debt and slow growth

NY TIMES NEWS SERVICE , BEIJING

A Hong Kong entrepreneur with a reputation for brash business moves and a Chinese government-owned telephone company have sealed an alliance that has left many industry analysts puzzled.

China Network Communications Group (中國網通), known as China Netcom, announced on Thursday that it would buy 20 percent of the Hong Kong telephone operator, PCCW Ltd (電訊盈科), for US$1 billion. China Netcom, which is based in Beijing, is the country's second largest fixed-line telephone operator. China Telecom is the largest.

PCCW is led by Richard Li (李澤楷), its founder and chairman, who is also the 38-year-old son of the Hong Kong multibillionaire Li Ka-shing (李嘉誠). Richard Li has sought to establish himself as an information industry mogul.

The two companies said on Thursday that the deal was part of a strategic alliance that would allow them to pool their strengths and expand in China and internationally.

"This is a win-win transaction which will create opportunities for both parties," Zhang Chunjiang, general manager of China Netcom, said in a statement.

But many analysts reacted coolly to the purchase, saying there was no compelling rationale for it. Both companies, analysts said, are being pressured by debt, competitors and slow growth.

In addition, China Netcom would be paying US$0.76 a share for the stake -- a 26 percent premium on PCCW's closing price on Wednesday on the Hong Kong stock exchange. Trade in PCCW was suspended on Thursday, pending the announcement.

PCCW was begun as Pacific Century Cyberworks in 2000, when Li used his then high-flying Internet company to buy Hong Kong's former telephone monopoly. Since then, its share price has fallen 90 percent; the company sold its mobile phone service to Telstra of Australia in 2002, and its revenues from fixed-line telephones have been eroded by competition from rising rivals like Hutchison Global Communications. PCCW is US$3.8 billion in debt.

"For Netcom, I can't see why it's such a great deal," said Duncan Clark, the managing director of BDA China, a research group based in Beijing. "The asset they're buying into is pretty unexciting."

In return for Netcom's purchase, PCCW gave China Netcom three directorships on its board and promised to spend US$640 million on telecommunications projects in China.

But some analysts say PCCW is under no obligation to spend that money in China, and it is still free to pursue deals with Netcom's Chinese rivals. Allen Ng, an analyst with BOC International in Hong Kong, says PCCW is not under any obligation to invest the money with China Netcom, or indeed to spend it at all.

PCCW draws nearly 80 percent of its revenues from Hong Kong, a small and relatively settled market, and Li said the deal with China Netcom would give his company greater access to China's growing market. The number of telephone subscribers in China has been growing about 90 million a year in recent years, and this year the total may reach 750 million, about half of them for mobile phones.

Some analysts thought the alliance might help China Netcom build its market share at home. China Netcom and its Hong Kong-listed subsidiary have over 100 million subscribers, mostly in northern China, and PCCW's marketing experience may help them establish a foothold in China's richer telecommunications markets in southern China, said Joe Zhou, a senior analyst in Beijing with Analysys Consulting.

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