Political aspects of PCCW bidding war set to deepen
The bidding war that has emerged over PCCW has turned into a political hot potato for all parties involved - majority shareholder Richard Li Tzar-kai the Chinese government and rival suitors Macquarie Group and TPG-Newbridge Capital.
It is likely to get hotter in the coming days, as the sale is fast becoming a complex issue carrying heavy political undertones. Hong Kong's international image and its reputation for economic and financial freedom will take a beating if Mr Li continues to push for the sale and the central government - the company's second largest shareholder through state-controlled China Netcom - remains equally determined to quash it.
However, there is still hope that a solution can be found.
A brief history lesson is needed to understand how a seemingly normal business transaction could become politicised so fast.
When Mr Li won the battle for control of Cable&Wireless HKT in 2000, he received heavy backing from mainland authorities concerned about a rival bid by determined Singapore Telecommunications (SingTel). The Bank of China was one of the leading lenders to Mr Li's war chest, and he also received political blessings from senior officials in Beijing.
But since the bursting of the technology bubble and Hong Kong's efforts to liberalise its telecom industry, the company now known as PCCW has seen its stock price plunge and market share dwindle.
More importantly, it has made little headway in expanding into the mainland's potentially lucrative telecom market, despite promises of help from Beijing officials.
Beijing could have eased PCCW's entry into the mainland market by including the opening of China's telecom sector in the Closer Economic Partnership Arrangement. But this has been held up by wrangling between central government ministries.
As the central government realised Mr Li was growing impatient, China Netcom stepped in and bought 20 per cent of PCCW for US$1 billion in January last year.
Mainland authorities have refrained from taking majority control of PCCW for fear of accusations of meddling with public utilities in Hong Kong.
But Beijing has also been equally adamant that PCCW, which provides essential telecom services to the Hong Kong government and major businesses, should remain in the hands of Hongkongers and not be sold to foreign investors.
From Beijing's perspective, foreign takeovers of major telecom providers are rare even in the most western countries due to perceived political and strategic implications.
The strong statement from China Netcom which followed the announcement of the bidding for PCCW's core assets reflected the central government's position when it said it 'did not want to see any changes in PCCW which is owned and managed by Hong Kong people'.
What also angered officials in Beijing was that Mr Li, characteristic of his style, failed to notify the mainland authorities in advance of the sale and was seen as the key person promoting the sale of PCCW's core assets.
Mainland sources said representatives of Macquarie Group and TPG-Newbridge last week met high-ranking officials in Beijing to gauge their reactions.
The officials were said to have left little doubt that they would vigorously oppose the current deal. That explains a flurry of reports saying both firms were willing to revise their offers and planning to offer China Netcom up to a 50 per cent stake in the deal.
But mainland sources have said China Netcom was unlikely to change its position - that it will not increase or reduce its PCCW stake. What is going to happen next?
With Beijing's adamant opposition, it will be almost impossible for Mr Li to push for the sale in its current form. Even if Mr Li wanted to, the two bidders would probably not be willing to offend Beijing.
But it also looks unlikely that the deal will be scrapped completely, not least because this could cause an uproar among PCCW's hundreds of thousands of long-suffering shareholders - most of them Hong Kong residents - eager for a cash payout and prompt them to take to the streets.
A more likely outcome is that prominent Hong Kong investors could be persuaded to join Macquarie's or TPG-Newbridge's consortium as key shareholders to ease Beijing's fears over the sale to foreign parties. For this to happen, Beijing should also step up efforts to include opening of the mainland's telecom sector in the Cepa scheme.
