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July 11, 2006
PCCW Will Stay Under Chinese Control
If you need more evidence that Beijing is pulling the welcome mat on foreign companies trying to buy Chinese corporate assets, consider the outcome of the bidding war for PCCW, the Hong Kong based fixed line, Internet and pay-tv company. PCCW Chairman Richard Li, the son of Hong Kong billionaire Li Ka-shing, is selling his controlling 22.7% stake in the company to Hong Kong investment banker Francis Leung. And that is sweet news for mainland-based China Network Communications, a state-owned company and major PCCW shareholder which had objected to the Hong Kong telecom falling into foreign hands.
Since mid-June, PCCW had been at the center of a two-way bidding contest between the Australia?? acquisitive Macquarie Bank and private equity powerhouse Texas Pacific Group. The sale to Leung, the former Asia Chairman for Citigroup, effectively ends that contest. Meanwhile, dealmaker Richard Li, who engineered the 2000 acquisition of Hong Kong's biggest telecom operator, Hong Kong Telecom, from Britain's Cable&Wireless for $28 billion, is walking a way a very wealthy man.
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No doubt, China is becoming more sensitive about foreigners buying into Chinese companies. Seems everybody in China is familiar with CCNOC's failed efforts to buy Unocal, seems everyone blames the U.S. government for that, and seems that is the rationale for a lot of corporate nationalism.
Posted by: China Law Blog at July 12, 2006 09:19 AM
Mr. Bremmer, I think you're missing the point and the behind the scenes chronology of this transaction. CNC must be simply furious that it's being made to look like the bad guy by Richard Li in this case. CNC would have never accepted a foreign takeover and Li must have known this or was so inept he failed to consult them. Li probably thought he and his family "owned" HK and forgot he was in China. He and his cronies probably thought they were being clever by cooking up an offer from TP and Macquarie (note that Simon Murray is the chairman of Macquarie Asia and Li has a relationship with TP) and putting pressure on CNC. And he thought CNC would be enticed by money. He forgot that PRC state owned entities act on a completely different agenda.
So Li either used TP and Macquarie as decoys and suckers for leveraging CNC. Or to attract other bidders. Since CNC reacted badly, no other legitimate bidders stepped up- who wants to directly affront the Chinese govt? So Richard Li was looking pretty stupid until his Dad coaxed his old banker Francis Leung to step in and save face. Just look at the financing structure: Li is lending 70% of the purchase price. Leung is no tycoon; he is a wealthy banker, but in no position to fund such an acquisition. And no bank in HK would enter into the transaction. And look at how adversely other banks reacted to the whole deal by demanding to shore up their security position in PCCW loans.
So no, it's not CNC's fault; they never invited an offer and any banker or investor with any common sense knows telecom is a sensitive sector. Either Richard misled TP and Macquarie as to CNC's disposition or TP and Macquarie were utterly naive. You take your pick as all look stupid.
The PCCW debacle sets back the HK financial market's reputation making it look like a tawdry, unsophisticated noodle stall. It's so easy to see through the inanity of this entire transaction. It's predicated on a spoiled rich kid who has no interest in running a business, only on using his family connections to make quick bucks no matter how much he hurts society at large. And in his case, he is more detrimental than smaller businessmen. Then, his dad has to step in to fix the mess. I'm sure the PRC Govt is infuriated with Richard Li's temerity.
The only upside to this story is that Richard Li is free to leave HK and I hope he takes his business practices to China where he will find his limitations. Instead, we may be forced to watch this sad charade again as he buys a HK newspaper and pathetically tries to imitate Rupert Murdoch.
Posted by: M & A at July 17, 2006 03:47 AM