PCCW looks to acquire Sunday

Regulators examine potential insider trading following announcement that PCCW wants to acquire Sunday Communications.

It emerged yesterday (June 13) that Hong Kong's leading fixed line telco PCCW is seeking to acquire smaller mobile operator Sunday Communications in a deal that will see PCCW re-enter the mobile market it left in 2002. It is understood PCCW intends to pay $200 - $250 million in cash for the company.

At the time of going to press it was unclear what structure the deal would take and what valuation PCCW is proposing to pay. So too, it has emerged that Hong Kong's regulators have begun investigating details surrounding the announcement and the share trading patterns of the two companies involved.

In the case of Sunday, the firm's share price rose from HK$0.48 to HK$0.53 a share between Thursday and Friday of last week - a rise of 10.4%. Crucially, the volume of Sunday's shares traded rocketed from around 750,000 shares on Monday June 6 to 1.1 million on Tuesday June 7, then too 5.2 million on Thursday June 9 and 39 million shares on Friday June 10.

Sources at the regulators confirm they are examining the share purchases for possible irregularities. It seems obvious that someone knew that the deal was imminent.

Regulatory interest has not stopped with Sunday.

Since May 20, records on the HKEx website show that PCCW chairman Richard Li has made seven separate purchases of PCCW shares for a total consideration of HK$72.4 million ($9.3 million). Li remains the major shareholder with 26% of the company.

Sources at one of the two Hong Kong regulators have confirmed to they are aware of these share purchases and have been examining whether there have been irregular trading patterns. "We're looking into this and there does appear to be prima facie evidence of insider dealing here," says the unnamed official.

Sources at PCCW suggest any share purchases by Li were more likely the result of his wanting to keep his stake in PCCW around the 26% level. However, on May 26 it was announced that PCCW would redeem a convertible note it issued to Telstra in June 2002.

Yet in its corporate announcement that day, the company stated it would pay Telstra $58 million in cash to redeem the note rather than convert the note into shares. As a result there would be no dilution of the existing shareholders. Whether Li's share purchases were an oversight or just an honest attempt to maintain a position in the company, there is no denying that they reveal a certain lack of foresight taken in the context of the Sunday acquisition and questions are sure to be asked as to the reasons behind them. Both of Hong Kong's two main regulatory bodies, the SFC and the HKEx have recently moved into a more aggressive mode of enforcement of the rules, after many years of regulatory upheaval.

Market sources suggest that HKEx is being particularly stringent in its examination of new listings, while the SFC is looking closely at any market malpractice. On top of this regulatory scrutiny of Sunday and PCCW could be added allegations of poor disclosure of information.

News of the deal started with an un-attributed leak in the Wen Wei Po newspaper, a paper known to be close to the Chinese government. PCCW recently sold a 20% stake in itself to state owned China Netcom.

Wen Wei Po suggested an investment in Sunday would be a good way for China Netcom to develop its own high-speed wireless network in China. At this point the companies moved into action.

According to HKEx's website, Sunday requested its stock be suspended at the start of the day's trading at 9.30am, "Pending the release of an announcement in relation to price-sensitive information." PCCW waited until 9.47am to request its suspension, this time "Pending the issue of an announcement regarding a notifiable (sic) transaction."

PCCW's chairman Richard Li confirmed the story on the sidelines of the Pacific Basin Economic Council's annual conference in Hong Kong in a TV interview carried on Hong Kong state TV and radio broadcaster RTHK. The story was subsequently picked up by the wire services to the surprise of senior executives at PCCW and Sunday.

From then on, the rest of the day was marked by silence from both companies. An expected corporate announcement by both parties was needed to resume trading in their shares but never appeared.

Investors and analysts have said they are bemused by the situation but hardly surprised. After all, Richard Li has made a name for himself in revealing deals his company is doing, before the market was ready to hear about them.

In June 2003, Li surprised his senior management and shareholders, when he prematurely revealed the sale of PCCW's 40% stake in its mobile JV to Telstra - the last time PCCW was in Hong Kong's mobile market. Famously, at the company's 2003 interim results announcement, Li was told to sit in a room ten floors above the waiting analysts and journalists and conduct the conference by video link, so his agents could pull the plug if he said anything untoward.

The irony is that for a chairman of a communications company, Richard Li should have developed a reputation for making such a mess of communicating to the market. Incompetence aside, some analysts believe the deal - if it happens - makes eminent sense for the overall market.

With six mobile operators serving seven million people, the competitive landscape in Hong Kong is too crowded. Very few operators make any real money, which means service levels are poor and innovation non-existent. Even Hong Kong's biggest company Hutchison chose to develop is own 3G service in the UK and Italy before launching in Hong Kong, in a damming indictment of Hong Kong's competitive landscape.

3G also plays a part in the Sunday acquisition. Sunday has a 3G license in Hong Kong and chose yesterday to announce that it was commencing its commercial roll out. Thus by acquiring Sunday, PCCW not only gets Sunday's 8.4% share of the 2G market, but also its 3G potential.

Sunday is also a pioneer user of Huawei's 3G equipment - Huawei having bought an 8% stake in the company earlier this year. And so PCCW's acquisition would give a boost to that business, especially if it flowed through the shareholding structure to China Netcom.

Thus the three companies together - Sunday with its Hong Kong mobile and 3G potential, PCCW with its fixed line, international and value added services, and China Netcom with its huge China footprint - could make a formidable Asian telco, with perhaps more upside for China Netcom than for the other two companies. Even so, the most important aspect of the acquisition is that it could spur further rationalization in the North Asian telecom market.

This would go a long way to improving Hong Kong's fragmented communications market. If only Richard Li's corporate communications could be similarly upgraded.

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