PCCW deal raises political concerns

The prospect of a Chinese government firm becoming the largest shareholder in Hong Kong’s core telecommunications network has raised concerns among lawmakers, as a politically-charged battle for PCCW’s telecom and media assets enters its second week.

To win over China Netcom, PCCW’s second largest shareholder after tycoon Richard Li, Australia’s Macquarie Group has proposed that the State Council-controlled company take up to a 50 per cent stake in the assets, with another 25 per cent reserved for retail investors.

A person familiar with the deal said rival bidder TPG Newbridge Capital had made a similar offer to Netcom, which last week expressed strong reservations about the proposed transaction.

In bending over backwards to appease China Netcom, however, Macquarie and TPG Newbridge have raised concerns among some legislators, highlighting the sensitivities surrounding China’s political and commercial clout in the territory.

“Under one-country-two-systems, Hong Kong has to be separate from the rest of China,” said Emily Lau, a pro-democracy legislator. “If China’s presence is too big [in Hong Kong] it’s not going to help anyone. China has to exercise self-restraint.”

Sin Chung-kai, a legislator and economic affairs spokesman for the Democratic party, expressed reservations but acknowledged there was no legal basis to challenge a commercial transaction that could potentially give China Netcom control over the city’s phone network. With no barriers to outside investment in the sector, the Office of the Telecommunications Authority can only block deals if they would dampen competition in the sector.

There is also nothing to prevent Mr Li, who is keen to end his six-year foray into telecoms, from selling his company’s assets to Macquarie, TPG Newbridge or another overseas party pending shareholder approval. According to people close to the transaction, Macquarie was surprised by PCCW’s unilateral announcement of its offer on June 19, in an apparent effort to spark a bidding war. TPG Newbridge entered the fray a day later.