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China Netcom welcomed the PCCW deal yesterday, saying it would further cooperate with Hong Kong's largest phone operator.

 

But local minority shareholders disagreed and began selling PCCW shares, causing a drop in share prices.

 

"China Netcom Group welcomes Mr (Francis) Leung's participation and believes he will contribute to the continued and healthy development of PCCW," Netcom said in a statement early yesterday.

 

The company stressed it would "maintain and strengthen its strategic partnership."

 

Last year China Netcom paid US$1 billion, or HK$5.9 (76 US cents) per share, for a 20 percent stake in PCCW. It is now the second largest shareholder in PCCW.

 

But shares in Netcom's listed unit in Hong Kong, China Netcom (Hong Kong), fell by 5.15 percent to HK$13.8 (US$1.77) yesterday.

 

On Monday, PCCW's controlling shareholder Richard Li agreed to sell a 22.66 percent stake to local banker Leung, who is believed to have good relations with Netcom and many big mainland companies, for HK$9.16 billion (US$1.17 billion).

 

The deal, however, caused a drop in PCCW's share price yesterday, despite Li personally earmarking HK$1.38 billion (US$177 million) for minority shareholders as a special dividend. His offer will translate into as much as HK$0.38 (4.9 US cents) per share.

 

PCCW shares declined by as much as 9.9 percent, hitting a low of HK$5 (64 US cents) before regaining a bit to end the day at HK$5.1 (65 US cents). That compares to a previous closing price of HK$5.55 (71 US cents).

 

"I think local investors were a bit disappointed because the deal was not as they previously expected," said an analyst. "They had thought it would be selling PCCW's core business, but not selling Li's holding to Leung."

 

Some analysts said two other bidders Macquarie Bank and US buyout firm Texas Pacific Group's Asian arm TPG-Newbridge might still have the chance to access PCCW's assets.

 

PCCW said yesterday that it would continue discussions with them.

 

"It is still possible for Leung to invite Maquarie or TPG to be partners in the consortium as minority shareholders," said Steven Leung, director of institutional sales for UOB-Kay Hian.

 

"He is a very experienced investment banker and this is one way for him to solve the problem," Steven Leung added.

 

The former chairman of Citigroup's Asia investment arm, Leung said on Monday that he "will not rule out the possibility of inviting other parties to invest in PCCW later."

 

Francis Lun, general manager of Fulbright Securities also said Leung's ownership of PCCW could be "brief," although Leung said on Monday he eyes long-term investment.

 

"I think he wants to work out a deal so that he can sell to Macquarie or TPG," said Lun.

 

The two companies have previously offered US$7.55 billion and US$7.3 billion respectively to buy PCCW's main phone and media assets.

 

Investment banks and rating firms also downgraded PCCW, pending further developments.

 

"We see the potential acceptance of this bid as negative for PCCW's share price and believe that the share price is unlikely to trade reflecting an acquisition premium," Deutsche Bank said in a research note, downgrading the stock to "hold" from "buy."

 

Standard & Poor's adjusted the stock down to "negative," saying that it "would take time to see how PCCW solves a series of uncertainties arising after the bid such as those regarding the company's future financial structure, management, operation, and possible restructuring of its business."

 

(China Daily July 12, 2006)