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China Netcom Eyes PCCW Stake

The parent company of China Netcom Corp. Ltd. (NYSE: CN; Hong Kong: 0906), China's second largest operator, looks set to pay over the odds for a slice of Hong Kong carrier PCCW Ltd. (NYSE: PCW; Hong Kong: 0008) in order to gain an international foothold.

Media reports suggest that China Netcom Group is about to pay HK$5.80 (US$0.74) per share, about 19 percent higher than today's closing price of HK$4.88 (US$0.63) on the Hang Seng Index, for a newly issued 20 percent stake in PCCW. That would cost Netcom about US$1 billion, according to Reuters.

Such a deal would conclude a process that has been in the works for weeks, but at a price higher than analysts were expecting. On December 14, PCCW reacted to rumors that Netcom would buy a 29 percent stake in PCCW for US$919 million by admitting the two companies were negotiating terms for a new 20 percent stake.

The move signifies China Netcom’s further desire to break out of its core market in northern China and expand in the south and overseas (see China Netcom Acquires Asia Netcom). PCCW is the dominant fixed-line operator in Hong Kong, and has business units in southern mainland China, Japan, Malaysia, Korea, Taiwan, Singapore, and even the U.K. and U.S. In the nine months to September 30, it recorded net income of HK$1 billion (US$128 million) from revenues of HK$16 billion (US$2.05 billion).

A stake in PCCW would also give Netcom an inside track into IPTV services, which the Chinese operator is set to launch through a joint venture called Tiantian Online. PCCW has gained a lot of video-over-broadband experience in the past year, and has grown the subscriber base for its broadband TV service in Hong Kong to more than 350,000 from just a few thousand in late 2003 (see PCCW Launches Phone TV, PCCW Uses Tandberg for IPTV, and PCCW Expands IPTV Deal With Tut).

Fellow Chinese operator China Telecommunications Corp. (NYSE: CHA) has already launched its IPTV service and has aggressive expansion plans for 2005 (see China Telecom Launches IPTV).

Such a sizeable investment by Netcom would help PCCW pay off some of its $5 billion debt pile, but the new shares issue would also dilute its stock.

The news buoyed PCCW's share price, as it rose 13 cents, more than 2 percent, to $6.30 by early afternoon in New York. But Netcom's stock dipped 75 cents, nearly 3 percent, to $25.40, perhaps reflecting some analysts' views that Netcom could find a less costly and more flexible way to expand outside its home turf.

— Nicole Willing, Reporter, Light Reading

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