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Analysis: Telecom deal may hurt HK reputation: analysts


The controversial sale of a major stake in Hong Kong's dominant telecom, PCCW Ltd (電訊盈科), has sparked concerns over corporate governance as legislators prepare to scrutinize a deal that analysts fear has put the territory's business reputation at risk.

Analysts said the deal did not reflect well on standards in Hong Kong with smaller investors in particular ignored while the larger parties, including Beijing, worked out the details to their advantage.

"The whole matter was very unusual and there are things that are not transparent," said Christine Loh (陸恭蕙), head of the independent think-tank Civic Exchange and also a director of the Hong Kong Stock Exchange.

"But you can see now it's clearly a connected transaction between father and son. All the statements the key players have made over time of course point to confusion and raised concerns about corporate governance," she said.

Francis Leung (梁伯韜) announced in July he would buy a 22.66 percent PCCW stake held by PCCW chief Richard Li's (李澤楷) Singapore-listed Pacific Century Regional Developments (PCRD) for US$1.17 billion.

But the agreement to sell the stake came after Li knocked back rival offers of up to US$7 billion from Australia and the US.

Talks with Macquarie Bank and TPG-Newbridge for the core telecom and media assets were squashed after state-owned China Netcom (中國網通), PCCW's second largest shareholder with 20 percent, objected on security concerns.

This was widely interpreted that China Netcom's parent, China Network, was acting on behalf of Beijing, which did not want to see a strategic asset such as Hong Kong's largest fixed line communications carrier fall into the hands of offshore interests.

As a result Hong Kong's reputation as a freewheeling capitalist playground took a hammering but when Leung stepped in with his offer the markets were shocked even further after comparing it with the foreign bids.

Analysts said political expediency was seen as winning out over a fair deal for all of PCCW shareholders, with minority interests losing out on a much higher offer.

Li claimed it was the best possible deal he could make.

It was also said his father would not be involved in the deal due to competition issues as the elder Li controls Hong Kong's other telecom conglomerate Hutchison Whampoa (和記黃埔).

Then last week, Leung ended months of speculation by revealing Li Ka-shing (李嘉誠), Asia's richest man, and Spanish telecom Telefonica were the main buyers of the ailing fixed-line operator.

Leung's long-time friend -- the elder Li -- declared he would stump up US$622 million for a 12 percent stake in his son's company through his charity funds.

It also emerged that China Netcom and Telefonica have set up a new vehicle that will see it become the largest stakeholder in PCCW with 27.94 percent.

Although the Hong Kong government says the sale falls within the scope of three local independent regulatory bodies, legislators are set to grill officials and discuss possible irregularities in the deal.

"We feel there isn't enough transparency in the deal. The whole matter is a mystery," lawmaker Albert Cheng (鄭經翰) said.

Cheng, chairman of the ITB panel, voiced his concerns over the elder Li's dominant position in the city's telecom sector because of his ownership of Hutchison Whampoa.

The Legislative Council information technology and broadcasting panel and the Finance Committee will look into the issues of potential domination of the local telecom market by one group and cross-media ownership as well as its public interest repercussions.

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