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August 6, 2006 10:01 pm

Hedge funds set to turn up heat on Li

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Richard Li, the entrepreneur at the heart of the controversy over Hong Kong’s PCCW, looks set to come under pressure from hedge funds to distribute to minority shareholders a chunk of the HK$9.2bn ($1.2bn) his holding company will earn from the deal.

Hedge funds are taking larger positions in Pacific Century Regional Developments, Mr Li’s Singapore-listed company, following the announcement that PCRD will sell its 23 per cent controlling stake in PCCW, Hong Kong’s dominant telecoms operator.

The PCCW stake is being purchased by Francis Leung, an investment banker, with Mr Li agreeing to spread payments over two years.

Mr Li turned to Mr Leung after failing to sell PCCW’s core assets to overseas buy-out groups – both of which had offered more than $7bn – as a result of nationalist concerns in Beijing.

Mr Li has not said what he plans to do with the proceeds, though people close to the entrepreneur believe he could use the money to turn PCRD into a buy-out fund.

But according to bankers familiar with the situation, some hedge funds believe they could profit from the uncertainty by forcing Mr Li to pay PCRD shareholders a special dividend.

Hedge funds are gambling that PCRD will remain a listed company in the short term. TPG/Newbridge, a US buy-out firm, has offered to take the company private by offering minority shareholders S$0.30 a share. But this month’s vote on the offer is widely expected to fail because Mr Leung’s HK$9.2bn offer implies a value of S$0.47 a PCRD share.

One Hong Kong-based hedge fund broker said his clients had “significantly” stepped up trading in PCRD over recent weeks, and pointed to a battle of wits between short-term and long-term investors.

The hedge fund activity is believed to lie behind a sharp rise in PCRD shares’ trading volumes this month. Daily volumes averaged 3.9m over the past year, but more than 15m PCRD shares changed hands last Friday.

One banker familiar with the hedge fund activity said: “Hedge funds are smelling an opportunity as there is a lot of uncertainty. Once the [TPG] vote is over, they will do something. Unlike the usual shareholders in PCRD, these guys know how to assert minority rights.”

The banker said Mr Li has agreed to compensate minority shareholders in PCCW, by paying a special HK$1.38bn dividend.

PCRD and PCCW declined to comment.

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