C&W HKT - from boring monopoly to high-risk start-up?

C&W HKT shareholders are being asked to say goodbye to dividends "for the foreseeable future" and prepare for an uncertain ride in PCCW-HKT.

The board of Cable & Wireless HKT (C&W HKT) is warning its shareholders to prepare for change if, as it recommends, they choose to accept an offer from Pacific Century CyberWorks (PCCW).

"The financial risk profile of HKT will change from that of a company with substantial cash reserves, little debt and a history of regular dividend payments, to being part of a group with significant debt and which is unlikely to be able to pay dividends in the foreseeable future," says the board.

The general undertone of the risk factors section in the circular being sent to shareholders is prepare for cash-calls, take a long-term view and by the way, this might not work.

Francis Yuen, deputy chairman of PCCW, says the financial profile of PCCW-HKT should be fine. "We are very comfortable with the cashflow situation of the merged group," Yuen says, adding that high-growth companies - such as PCCW or PCCW-HKT - don't pay high dividends. He expects PCCW-HKT's borrowings to fall quickly below $6 billion once the merger has been completed, in part due to a cash injection from Telstra as part of a prearranged deal to bundle certain assets together. Assuming this is the case, PCCW-HKT should enjoy a BBB credit rating, he adds, citing the opinion of advisers Morgan Stanley Dean Witter and JP Morgan.

Here's the carrot

Provided the new entity, to be called PCCW-HKT, does have the bucks to expand after servicing its debts, paying for the construction of Hong Kong's Cyberport development and possibly acquiring Cable & Wireless' (C&W) 15% stake in MobileOne (Asia), a Singapore mobile phone joint-venture, there is potentially some upside.

"The combination of HKT and PCCW is expected to bring together the capabilities and assets required to create a leading force in the major growth markets of internet and telecommunications, including broadband internet and distribution, global internet protocol (IP) network services, regional mobile services and business e-commerce services, initially in Hong Kong and elsewhere in the Asia region and ultimately globally," says Linus Cheung, chief executive of C&W HKT. "It's a win, win, win for everybody."

The new entity would be split into seven business divisions; broadband internet, business-to-business (B2B) e-commerce, data centres, an IP backbone network, regional mobile telecommunications, fixed network telecommunications and venture capital. Of these, Alex Arena, managing director of PCCW, says the mobile phone arm and the IP network are front-runners for separate listings and the proceeds from these initial public offerings would help reduce the parent company's debts.

And the stick

In the unlikely event that C&W HKT shareholders reject PCCW's offer, they face the prospect of reduced dividends as a result of heightened competition in Hong Kong's market for basic telecommunications services, most notably international direct dial (IDD) and mobile, and would have to wait for on-going investment in new business areas to generate new income streams.

Also, should C&W, which owns 54% of C&W HKT, get cold feet and withdraw its support for PCCW's offer, a $100 million fine is payable. Althought the C&W board is behind the deal, whether or not its shareholders are supportive will become evident at the company's 13 June extraordinary general meeting.

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