PCCW saves C&W's bacon

One of the main reasons Cable & Wireless sold Hong Kong Telecom to PCCW could now be emerging.

The placement of Pacific Century CyberWorks (PCCW) shares by Cable & Wireless (C&W)completed overnight on Wednesday has caused the stock to plunge in value by 15.92% in little over two days. It did not help that the sale price of the shares at HK$9.88 ($1.27) was an 8% discount to the previous day's closing price and 37% lower than the HK$15.80 level at which C&W acquired the shares.

The sale has called into question the role that C&W has played in the great PCCW saga. Putting it more bluntly, an investor friend of mine recently asked, "What on earth must Cable & Wireless have been thinking when they decided to take the shares of PCCW as payment for the cash flows they got from Hong Kong Telecom [HKT]?"

Indeed it would be very amusing to have the minutes of that particular board meeting to see what was said. But in the absence of any such minutes (I doubt if they will ever see the light of day), we can only speculate.

One reason why they might have decided to take the overvalued shares of PCCW is that the board of C&W is very very naive. I think in the interests of probity and fair play, I will discount this theory - for the moment. It is also slightly unfair to castigate C&W with the evidence afforded us by hindsight - which is, after all, a very precise science.

Poison pill

Another reason they could have decided to take the shares is that with the loss of HKT, C&W was losing one of its key pillars of independence - namely the poison pill created by the 54% ownership. This worked because if anyone tried to buy C&W they would have to make a bid for the remaining 46% of HKT shares that were in the public domain. This would mean that any potential takeover of C&W would assume much higher costs than the original deal and would be fraught with market uncertainty. It was enough to turn away any potential suitor.

However, once HKT was bought from C&W, the company would officially be in play. Investment bankers were said to be lining up with clients all eager to buy C&W, with its strong presence in international IP backbones - one of the most lucrative areas of the global telecoms pie.

But as a result of the sale to PCCW, C&W has replaced the poison pill of HKT with the poison pillbox of a 21% stake in Richard Li's baby. This should ensure C&W's independence for some time to come.