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Media Shift Triggers City Telecom Sale

The telecom industry lost one of its savvier and more colorful entrepreneurs last week when Ricky Wong sold his Hong Kong broadband and voice business to an Asian division of CVC Capital Partners .

In a surprise move, Wong unloaded City Telecom (HK) Ltd. 's fiber access network, international capacity, and IDD business to the private equity firm for HK$5.01 billion (US$643 million).

Wong didn't give a reason for his exit from telecom, but the company said in a statement that it needed HK$2.5 billion ($322 million) over the next four years to build out its media operations.

Wong will remain as City Telecom (CTI) chairman to steer the media business. The bulk of the senior management team, including CEO William Yeung and CFO NiQ Lai, will move to the new vehicle, but under the brand it currently uses, Hong Kong Broadband Network (HKBN).

Founded 20 years ago as Hong Kong's first callback operator, CTI is now the city's largest broadband player behind the incumbent, PCCW-HKT.

Its fiber network passes approximately 2 million homes -- or 87 percent of all households -- offering broadband, VoIP, IPTV and IDD.

At its 2010-11 full-year result it posted 45 percent higher net earnings of HK$314 million ($40.4 million), with EBITDA up 27 percent rise and sales increasing 7 percent.

That was in the face of competition from some of the Hong Kong's most powerful tycoons, including: Li Ka-shing, Asia's richest man, who heads Hutchison; his son, Richard, who controls PCCW; and the Wharf group, which owns the city's sole cable TV firm iCable.

As well as benefiting from Wong's ability to outfox his bigger competitors, CTI's strength has been its technology.

It decided at the turn of the millennium ago to roll out what was to be the world's biggest Metro Ethernet deployment, taking advantage of the city's small geographical footprint.

It then delayed building out a fiber network until nearly a decade after its rivals, giving it an almost unchallengeable advantage in network cost -- around $200 per household, almost certainly the world's lowest.

CTI calls this LUCA -- its Legal, Unfair, Competitive Advantage.

It is thanks to LUCA that Wong has been able to offer high-speed connectivity at jaw-dropping prices, like a triple-play offer -- including 1 Gbit/s -- for HK$158 ($20) a month last August.

Its current 1 Gbit/s price is HK$269 ($35) -- and because it's Ethernet, that's 1-Gig symmetrical. CTI doesn't offer any service below 100 Mbit/s.

For the financial year 2010-11, it signed up 64,000 broadband subs, or 58.7 percent of all net adds in Hong Kong for the year, to increase its total to 590,000 subs. Market leader PCCW has 1.39 million.

CVC Asia managing partner Roy Kuan declined to be interviewed about the acquisition, but undoubtedly it is LUCA that has caught CVC's attention, despite an 87 percent broadband penetration in Hong Kong.

The disposal leaves 50-year-old Wong free to pursue his interest in media.

He made a brief but spectacular foray into the media business as CEO of the struggling free-to-air network ATV three years ago. He lasted two weeks in the job, citing differences with the chairman, Linus Cheung, himself a former CEO of the old Hongkong Telecom.

CTI took out a $50 million loan in December to build an HK$800 million ($103 million) multimedia center in Hong Kong.

It is also scaling up its content capabilities for the HKBN IPTV service as well as for a future free-to-air TV business. The company believes it will be issued one of three new FTA licenses.

CTI and CVC have set a deadline of Sept. 30 for completion of the deal.

— Robert Clark, freelance editor, special to Light Reading

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