HONG KONG, China -- China Netcom Group plans to pay around $1 billion for 20 percent of
Hong Kong phone company PCCW Ltd., sources closed to the deal said on Wednesday, a much higher price than investors had expected.
The group, the mainland parent of Hong Kong-listed telecoms operator China Netcom, is offering a premium of about 20 percent to PCCW's closing share price on Tuesday as it seeks to build its business in southern China and overseas, the sources said.
"The deal will be sealed by the end of next week, if not this week," said one source close to the deal.
Another source said China Netcom Group would pay more than HK$5.80 a share for new shares in PCCW, Hong Kong's dominant fixed-line phone operator.
Analysts had expected the bid to be only marginally above PCCW's market price, and the news supported its shares as the broader market slid.
PCCW was unchanged at HK$4.875 in Wednesday afternoon trade, making it the best performer in the benchmark Hang Seng Index, which fell 2 percent. Shares in China Netcom declined 1 percent to HK$10.05.
PCCW and China Netcom declined comment on the price of the deal.
PCCW said on December 15 it was in talks on the possible sale of a 20 percent stake to China Netcom Group.
China Netcom Group, the smallest but the most internationally ambitious of China's four big telecoms groups, wants to build its overseas presence and regards
Hong Kong as a springboard.
It bought the assets of the former Asia Global Crossing and plans to link up with PCCW to develop its business in wealthy southern China, which borders Hong Kong.
The sources said Netcom was willing to pay a premium for the stake because China, which is encouraging its big companies to expand abroad, did not want PCCW to fall into foreign hands.
"I don't think its too expensive," said Brian Yip, an analyst at Standard Life Investments. "Netcom may plan to eventually take a controlling stake in PCCW."
Analysts said the deal would help PCCW pay part of its US$5 billion of debts and save on interest payments, but it would reduce its earnings per share by around 14 percent.
"It's a good premium, but still earnings dilutive," BOC International analyst Allen Ng said.
Restructuring
The deal would dilute the stake of 38-year-old tycoon Richard Li, who controls the company, from about 31 percent to 25 percent.
"The deal may help PCCW's share price, but it doesn't change the company. It's not a deal that will benefit shareholders directly," said Tat Au Yeung, managing director of Apex Capital Management.
But Au Yeung said the deal fits China Netcom's strategy of expanding its business in southern China and overseas markets.
News of a possible tie-up between PCCW and the Beijing-based China Netcom Group emerged in May, when PCCW revealed it was in talks involving its core fixed-line unit and Netcom.
PCCW has taken several steps to restructure itself as its share of Hong Kong's fiercely competitive fixed-line phone business shrinks. Last year, it spun off its property portfolio into a separately listed firm.
Helen Zhu, a telecoms analyst with ABN AMRO, said the Netcom deal made little commercial sense.
"We do not believe PCCW can add substantial strategic value to Netcom. We think that any tie-ups or cross-border capacity requirements Netcom may desire can be negotiated on a commercial basis with PCCW or another service provider to achieve the same service outcome, without the need for an equity relationship," she said in a recent report.
