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Business planning

PCCW's Proposed Sale of HKT to China Netcom Sparks Speculation and Concern

Strategic Insights

— 2 min read

The sale of part of Hong Kong Telecom (HKT) to China Netcom, a mainland China fixed-line telecoms operator, has sparked speculation and concern in the market. Richard Li, controlling shareholder of PCCW, HKT's parent company, is planning to sell at least part of HKT to China Netcom, in what would be the largest acquisition by a Chinese state-owned group in Hong Kong since before the handover of sovereignty in 1997.

The deal, which is still in its early stages, would see China Netcom acquiring control of HKT, which has a 73% share of Hong Kong's fixed-line business. However, investors are concerned about the high debt of PCCW, which has a net debt of HKDollars 29.1bn (USDollars 3.7bn) at the end of 2003. Additionally, the sale would raise Netcom's profile and bulk up its assets ahead of a planned international public listing expected later this year.

Key Takeaways:

  • The proposed sale of HKT to China Netcom would be the largest acquisition by a Chinese state-owned group in Hong Kong since before the handover of sovereignty in 1997.
  • PCCW's high debt, with a net debt of HKDollars 29.1bn (USDollars 3.7bn) at the end of 2003, raises concerns about the sale.
  • China Netcom would gain control of HKT, which has a 73% share of Hong Kong's fixed-line business.
  • The deal would raise Netcom's profile and bulk up its assets ahead of a planned international public listing expected later this year.
  • PCCW's strong free cashflow, HKDollars 4.3bn last year, would help fund infrastructure development on the mainland.
  • HKT's long experience in operating in a more developed market could prove invaluable for Netcom as it rolls out its networks across northern China.

Statistics:

  • PCCW's net debt to net capital was 137% at the end of 2003, according to Barclays Capital.
  • HKT's share of Hong Kong's fixed-line business has declined from 82% in 2002 to 73% last year.
  • PCCW's enterprise value is approximately HKDollars 55.4bn, with telecoms accounting for about 70% of its revenues and the bulk of its debt.
  • HKT's enterprise value is likely around HKDollars 40bn, based on the company's debt and revenues.

Sources:

  • "PCCW May Sell HKT Stake to China Netcom" by Joe Leahy, The Financial Times, [no date]
  • Barclays Capital, "PCCW: Debt-to-Equity Analysis" [no date]
  • PCCW, "Annual Report 2003" [no date]
  • The Hang Seng Index, "Performance of PCCW" [no date]

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