Published December 17, 2008

PCCW investors urged to reject HK$14.9b buyout

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(HONG KONG) Shareholders of PCCW Ltd should reject a HK$14.9 billion (S$2.8 billion) buyout offer led by chairman Richard Li because it's too low, the world's two biggest proxy advisory firms said.

'We are not convinced that the financial terms of the proposed transaction are fair for the company's independent shareholders,' Glass, Lewis & Co said in an email yesterday.

David Smith, co-head of Asian corporate governance research at RiskMetrics Group, said that the offer was not 'in the best interest' of investors.

The comments clash with an assessment this month by PCCW adviser N M Rothschild & Sons (Hong Kong), and are a setback for Mr Li, who needs the backing of institutional investors at a Dec 30 meeting to pursue his plans to take Hong Kong's biggest phone company private. PCCW may cut its dividends if the takeover proposal fails.

'Initially, it was thought the offer was unfair because it does undervalue the company based on discounted cash-flow models,' said Arnout Van Rijn, who oversees US$1 billion in Asian equities including PCCW shares, as chief investment officer at Robeco Hong Kong Ltd. 'But in a market like today, everything will look undervalued, so you can say the offer is fair.' Robeco has yet to decide on whether to support the buyout proposal.

Yesterday, PCCW shares slipped 0.3 per cent to close at HK$3.57 in Hong Kong trading. The stock, which has fallen every year this decade, has dropped 23 per cent in 2008 and lost more than 97 per cent of its value from its peak in Feb 2000.

'Over the long term, PCCW shares should be worth more because the markets will recover,' said Francis Cheung, head of Asian telecommunications research at CLSA in Hong Kong. 'Obviously, Richard Li thinks that.'

Mr Li's Pacific Century Regional Developments and China Network Communications Group, which jointly control 48 per cent of PCCW, last month offered to buy the remaining shares at HK$4.20 apiece. The stock has yet to trade higher than the offer price since the buyout was announced on Nov 4, reflecting concern the bid will fail, according to Citigroup.

There's a 'medium-to-high probability' that the PCCW buyout offer won't proceed, Citigroup analyst Anand Ramachandran wrote in a Nov 26 report. There is 'continued market scepticism' about the bid's probability of success, Mr Ramachandran wrote.

PCCW, which controls two-thirds of Hong Kong's fixed line market, said that it won't guarantee to maintain its dividend payments if shareholders reject the buyout, according to a circular sent to investors on Dec 7.

The buyout proposal requires at least 75 per cent of independent PCCW shareholder votes at the Dec 30 meeting to gain approval. The plan would also fail if at least 10 per cent of the minority investors voted to reject the bid. -- Bloomberg