PCCW tables details of enhanced offer

PCCW explains to minority shareholders why the enhanced $3.93 billion take-private proposal, up 7% in value from the November offer, is reasonable.
PCCW yesterday provided details of the 7% price increase to HK$4.50 ($0.58) per share it is offering shareholders to take the company private.

Hong Kong telecommunications firm PCCW will hold an extraordinary general meeting on February 4 to vote on the new proposal. The price increase was first communicated to shareholders on the morning of December 30, the day PCCW had scheduled an EGM to vote on an earlier proposal to buy all minority shares outstanding at HK$4.20 per share. That meeting was postponed to give shareholders time to digest details of the new offer. The offerors have clarified that this is the final offer price, in other words the price will not be revised again.

The new offer price of HK$4.50 represents a premium of 21% over PCCW's closing price on January 9, the last trading day before the new scheme document was dispatched to shareholders. It is a premium of 27% over the average daily closing price for the 30 days up to and including January 9 and a 64% premium to 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. However, the offer equals a premium of only 1% to the average closing price in the six months to December 29.

PCCW is 22.7%-owned by Pacific Century Regional Development (PCRD), a Singapore-listed investment holding company which PCCW chairman Richard Li controls with a 76% stake. PCRD shareholders approved the earlier privatisation proposal at its EGM on December 29 and will shortly meet again to approve the enhanced price. Another 5.2% of PCCW is owned by Li through wholly-owned holding companies and by some other large shareholders acting in concert. China Netcom, a China-based telecom firm, owns 19.8%.

Through the revised offer price, the controlling shareholders have ascribed an equity value of HK$30.5 billion ($3.93 billion) to PCCW. The acquisition vehicle promoted by Li and PCRD under the name of Starvest will continue to put up 74.3% of the total outlay, while China Netcom will pay the remaining 25.7%.

After the delisting, Starvest will own 67% of PCCW while China Netcom will own 33%. The board of PCCW will comprise five PCRD/Li nominees and three China Netcom nominees. Both partners will have the right of first refusal on each otherÆs shares.

PCRD and Starvest are being advised by HSBC, which is also providing term loan financing 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, using cash on the company's balance sheet. The dividend payout will total between HK$18.1 billion and HK$18.8 billion.

A number of other banks have also secured a role on this deal, including some which have worked with PCCW on earlier investment banking deals. UBS is advising PCCW, while ABN AMRO Asia corporate finance (part of the RBS group) is advising China Netcom. PCCW's board of directors is being advised by NM Rothschild.

Proxy advisory firm Glass, Lewis & Co advised shareholders in December to reject the HK$4.20 per share offer, saying the PCCW board of directors had failed to provide a compelling strategic rationale for the deal. LiÆs plan to pay himself a special dividend out of the companyÆs cash balance also attracted criticism from Glass Lewis, despite the assertion of some banking sources that the traded share price should discount the cash on the balance sheet. Glass Lewis, which independently reviewed the bid as a service to shareholders, has not yet commented on the enhanced bid.

Rothschild, as part of its appointment, has however provided an opinion on the delisting offer to PCCW's independent shareholders. The firm has used trading multiples of comparable companies, sum of the parts analysis, PCCWÆs past traded price performance and comparable transactions analysis to corroborate that minority shareholders are being offered a fair price. With respect to dividends being used by Li and China Netcom to finance the deal, it has noted that the ôfinancing structure is a common structure for take-private transactions, as undertaken by private equity firmsö.

Whether or not PCCWÆs minority shareholders decide to support LiÆs latest attempt to extract value out of the company goes beyond numerical analysis and precedent deals. The fact that the offer is deemed reasonable and that the share price may not touch these levels in currently prevailing equity market conditions may be indisputable. But the last three years have seen Li make a number of attempts to financially restructure PCCW and shareholders have begun to feel that they are being short-changed. Shareholders need to believe that the latest offer is entirely above board.

PCCW gained 1.5% to HK$3.77 in Hong Kong trading yesterday, while PCRD closed 3.2% higher at S$0.16 ($0.11) on the Singapore Exchange.
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