Richard Li - internet guru, property mogul and son of the father - has just become a whole lot richer. His privately held Pacific Century Group company has sold 1% of the shares in listed subsidiary Pacific Century CyberWorks for a cool HK$3.8 billion ($487 million). What makes this placement so interesting is that the shares were probably to the Hong Kong government.
CyberWorks has completed its merger with Cable & Wireless HKT, the Hong Kong phone company. As a result, Cable & Wireless HKT was removed from the Hang Seng Index while PCCW has moved in to replace it.
A knock-on effect of the change in index constituents is that Exchange Fund Investments Limited (EFIL) and the Tracker Fund - the two vehicles that have emerged to manage the Hong Kong government's stock portfolio that was amassed when the government got heavy with speculators in 1998 - have to sell their holdings in C&W HKT and replace them with PCCW stock.
A look at the numbers supports the supposition that the Tracker Fund is the mysterious buyer of PCCW stock. PCCW's current weighting in Hang Seng Index is around 8.5%. C&W HKT's weighting was around 5%. Since yesterday, C&W HKT has been delisted but not yet fully merged with PCCW because the C&W HKT shareholders do not yet have the PCCW shares they are entitled to as a result of the takeover. Once completed, the combined PCCW's weighting in the Hang Seng Index is expected to be 13.5%-14%.
Hence State Street, manager of the Tracker Fund of Hong Kong - which has a mandate to deliver returns approximately in line with the Hang Seng Index - will have to raise its PCCW holding to 13.5%-14% of its HK$30 billion portfolio.
Tracking the stock
In anticipation of this event, traders in Hong Kong were reporting that ordinary holders of PCCW stock were all on the sidelines yesterday, salivating, offering their stock, expecting the Tracker Fund to come in and buy up the lot. But the phones were dead and the pits were quiet. Where was Hong Kong's finest investor? Didn't Tracker know it had to change its allocations? It appears that EFIL and Tracker were perfectly aware of what they were doing and they were doing it directly with Richard Li himself.
Indeed, Richard agreed to sell the entire stake at HK$15.81 - a 3% discount to Tuesday's closing price. With PCCW stock up today to HK$16.70, EFIL and Tracker have made a further 5.4% gain on their holdings in little over 24 hours. Once again this proves that the Hong Kong government should get out of social services, housing and public services and stick ruthlesslessly to fund management. It is so much better at managing the money than spending it.
Pacific Century Group made the following announcement in the wake of the deal:
"The Pacific Century Group Holdings Limited (PCG) wishes to clarify the circumstances whereby it sold some of its shareholding in PCCW, representing about 1% of PCCW after the merger with HKT, after the HK stock market closed on Tuesday, 8th August, 2000.
"PCG had been approached by a security house on Monday, 7th August, 2000 for a bought deal involving 240 million Pacific Century CyberWorks (PCCW) shares at 3% discount to the PCCW closing price on Tuesday, 8th August, 2000, ie. approximately HK$15.811.
"Given the particular supply and demand situation on the verge of the delisting of HKT and the imminent inclusion of PCCW in the Hang Seng Index and the technical nature of the factors in the market, PCG decided on the evening of Monday, 7th August, 2000 to make available the 240 million shares required to satisfy the bought deal.
"With respect to the proceeds of the bought deal PCG will use these to fund its existing on-going obligations and commitments. PCG intends to hold the rest of its shareholding in PCCW for the long term."
BNP Paribas Peregrine has admitted that it did the block trade for PCG, but officials at the bank would not confirm who the buyer of the stock was from them. Analysts in the maret are puzzled by Richard Li and PCG's motives behind this. The bidding frenzy that Tracker would have caused in its efforts to secure the stock in the open market would have caused the PCCW share price to rocket.
Li has done the government a favour: without him, the Tracker Fund would have had to try to buy PCCW shares in the open market. The amount that the Tracker Fund would have had to buy in the open market was equivalent to five days' total turnover of PCCW stock. Analysts are somewhat confused as to why Richard Li and PCCW gave away this chance to make their share price rocket. But remember: the government of Hong Kong awarded the Cyberport Project to Pacific Century Group without any competitive tender. One good turn deserves another. You give me HK$3.8 billion and I'll save you you having to spend time in the Stock Exchange of Hong Kong.