PCCW and Telstra announce strategic alliance

PCCW announces plans to divest C&W HKT assets to Telstra to finance acquisition while selling own debt to Telstra.

Honkong's Pacific Century CyberWorks and Telstra, the telecommunications giant of Australia, have announced plans to enter into a strategic alliance that aims to merge and spin off the two companies' mobile and internet backbone businesses. The deal will see Telstra invest $1.5 billion in PCCW through the purchase of a convertible note. Telstra will also invest $1.5 billion into the newly merged regional mobile phone company as well as injecting mobile assets worth $1 billion.

This will give Telstra a 40% stake in the new mobile company with PCCW owning the remaining 60%. Moreover, the two companies have announced that they will merge their data IP businesses to create a company that on day one will have earnings of $1.6 billion and be the largest internet protocol backbone company in Asia.

The two companies have also committed to work together to provide business services to international companies as well as develop an Australian HTML content business and to use PCCW's Network of the World (NOW) content, application and broadband channel in Australia.

Shareholders to decide

The whole deal is dependent on the shareholders of C&W HKT accepting PCCW's takeover, which is presently being completed through a scheme of arrangement.

The convertible note issued by PCCW to Telstra will have a tenor of six years and a conversion price of HK$23.65, although Telstra can convert the note into PCCW shares at any time it likes. With this investment, PCCW will be able to substantially reduce its debt burden incurred during the acquisition of C&W HKT.

On conversion of the note, Telstra will have a 2% stake in PCCW. "This is a historic inflexion point in the short history of convergence," says Ziggy Switkowski, CEO of Telstra. "Our relationship with PCCW reflects the dynamic and industry reshaping impact of the online and wireless environments. It is a defining moment for Telstra's position in Asia."

Richard Li, chairman of PCCW, said: "Our alliance with Telstra is another step towards achieving our vision of creating the world's largest broadband internet business."