PCCW set to spark bidding war for core assets

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Macquarie Group’s offer for PCCW’s telecommunications and media operations could be worth up to $8bn as analysts warned that the Australian bank’s offer could trigger a bidding war.

Texas Pacific Group, the US buy-out group, and its Asian investment arm Newbridge Capital, are believed to be considering a bid for the assets, people close to the deal said.

Any bid could also face opposition from China Netcom, the country’s number two fixed-line operator and PCCW’s second largest shareholder, which regards its investment in Hong Kong’s dominant telecoms group as strategic.

“When we invested in PCCW last year, it was for strategic co-operation and synergies. It’s not good for us if PCCW sells its telecoms assets,” a Netcom executive said on Tuesday.

“At present, Netcom has no plan to either increase or reduce its stake in PCCW,” the Chinese company said in a statement.

PCCW, controlled by Richard Li, the son of Asia’s richest man, Li Ka-shing, received an offer from Macquarie last week for its telecoms and media businesses, which accounted for 71 per cent of the group’s revenue last year.

Both companies declined to reveal the price tag, but it is understood that Macquarie would pay between $7bn and $8bn. It would not assume PCCW’s net debt of about $2.5bn.

With few details of the proposed deal emerging, analysts said it was difficult to calculate the exact premium Macquarie is offering to pay.

But they said a hefty premium would be needed to win support from China Netcom, which bought 20 per cent of PCCW for $1bn last year, or HK$5.90 a share. PCCW’s shares closed 8.3 per cent higher at HK$5.20 on Tuesday after being suspended on Monday at HK$4.80 pending an announcement on the deal.

According to the China Netcom official, the state-controlled company’s senior managers met in Beijing on Tuesday to discuss the deal but had not yet decided whether to support it. Wendy Liu, an analyst at Merrill Lynch in Hong Kong, wrote in a research note: “We doubt that a potential bid by Macquarie will have Beijing’s blessing as the target involves fixed-line telecom assets in Hong Kong.”

Apart from potential political roadblocks, Macquarie could also face a bidding war from other private equity groups.

Newbridge Capital in January tabled a $125m offer for a quarter of Mr Li’s Pacific Century Regional Developments, the Singapore-listed company that controls PCCW. The offer is still pending and some analysts said the US buy-out group could change tack and launch a counter-bid for PCCW’s telecoms assets. “Newbridge has the wild card,” said an analyst.

A deal would leave Mr Li with a listed company containing mostly property assets and large sums of cash.

PCCW has hired Lehman Brothers to study Macquarie’s offer. If the board accepts the proposal, it will need the support of at least 51 per cent of its shareholders to go ahead.

Its shares are suspended from trading on Wednesday.

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