Hong Kong telecommunications firm PCCW is 22.5% owned by Pacific Century Regional Development (PCRD), a Singapore-listed investment holding company which Richard Li controls with a 76% ownership stake. Another 5.8% is owned by Richard Li through wholly-owned holding companies as well as by some other large shareholders acting in concert. China Netcom, a China-based telecoms firm, owns 19.8%.
After the delisting, PCRD and Li will own 67% of PCCW via holding company Starvest, while China Netcom will own 33%. The board of PCCW will comprise five PCRD/Li nominees and three China Netcom nominees. Both the partners will have a first right of refusal on each otherÆs shares.
The outlay for the delisting is HK$14.9 billion ($1.9 billion). This assumes that the outstanding options are not exercised before the effective date, a reasonable assumption given that PCCW wrote in its Hong Kong exchange filing that none of the options is in the money at the offer price. Starvest will put up 74.3% of the total cost, while China Netcom will pay the remaining 25.7%.
The offer price of HK$4.20 per share represents a 53% premium over the closing price of HK$2.75 on October 13, the last full trading day before PCCW was suspended from trading pending details of the privatisation proposal. But it is only a premium of 7% over the average closing price over the last 30 trading days up to October 14 and a 9.5% discount to the average closing price over the past six months.
PCCW traded up to a six-month high of HK$5.16 in August (as shareholders eagerly anticipated a deal for the firm), then plummeted to a six-month low of HK$2.75 on October 13.
On October 12, PCCW decided to abandon its attempts to sell a 45% interest in HKT Group Holdings, a holding company created to own PCCWÆs core fixed-line, broadband and television assets. PCCW did not disclose to shareholders what bids were received for HKT and from whom, but media had earlier reported that seven private equity firms including usual suspects Macquarie, Carlyle, TPG and Bain were in the fray. Guesstimates of bid values were in the $450 million range, while sources suggest Richard Li had hoped for a valuation of around $2 billion.
PCRD and Starvest are being advised by HSBC who is also providing financing by way of a term loan to Starvest to effect the deal. Starvest will repay the loan with the proceeds of a dividend which will be paid by PCCW to all remaining shareholders after the delisting. The dividend will total between HK$17 billion and HK$17.6 billion.
"The shares are trading cum dividend thus the dividend is already discounted in the share price," suggests a specialist. But minority shareholders may not share the same viewpoint and could argue that Li is using dividends which should be shared by all shareholders to finance his own take-private scheme.
Sources close to the deal argue that the valuation is fair compared to the trading price of a group of Asian comparables. The median enterprise value (EV) to Ebitda ratio for the comps based on consensus numbers is 5.6 times 2008 and 5.1 times 2009. The PCCW offer price of HK$4.20 per share translates to an EV to Ebitda ratio of 6.1 times 2008 and 6.4 times 2009. On a price-to-earnings basis, PCCW has also been valued higher than its comps.
ôThe stock has been suspended for over two weeks and might well have fallen further as sentiment has been quite bearish, increasing the premium to market the offer price represents,ö adds another source.
But question marks still remain about whether minority shareholders will decide to tender their shares. Around half of PCCW's free float is held by small shareholders, say sources. And small shareholders can be unpredictable. The delisting can only proceed if 75% of shareholders approve it and less than 10% oppose it at the shareholder meeting.
The delisting proposal tabled on Tuesday is the latest in a series of attempts by Richard Li to cash out of PCCW. In early 2006 Li, along with private equity fund TPG-Newbridge, tried to delist PCRD from the Singapore Exchange (SGX). Minority shareholders of PCRD did not take the bait at the price they were offered.
Then by mid-year Li was approached by Macquarie to sell the telecom and media assets of PCCW. But this provoked an angry reaction from China Netcom who emphatically stated it was not in favour of the sale of ôstrategic assetsö to foreigners, effectively scuttling the deal. Li tried to hastily put together another deal, but this was shot down by PCRDÆs minority shareholders in November 2006.
This year Li tried to sell a stake in HKT.
The net result of all this is many PCCW shareholders believe that Richard Li is trying to unlock value from the company for his own benefit and disadvantage minority shareholders in the process. The price of HK$4.20 per share which is on offer may, on a standalone basis, look good but shareholders will have to be convinced everything is above board to play ball with Li.
ABN AMRO Asia corporate finance, part of the RBS group, is advising China Netcom on the current deal, while HSBC advises PCRD and Starvest. The board of directors of PCCW is being advised by N M Rothschild. Rothschild was also adviser to the board of PCCW on the HKT deal which was aborted.
UBS, who advised PCCW on the HKT transaction, was not as lucky, as it has no role in the current deal. Indeed, the laundry list of investment bankers who have worked on deals for PCRD and PCCW that did not eventuate is longer than the list of deals Li has aborted.
PCCW shares gained 27% on the Hong Kong Exchange when they resumed trading yesterday to close at HK$3.68, expectedly moving towards the offer price. PCRD gained 22% to S$0.22 ($0.15) on the SGX.