Hedge funds see opportunity in shadowy PCCW deal
Uncertainty creates investment opportunity, so it is no surprise that the shifting, shadowy struggle for control over the assets of Hong Kong's dominant phone company, PCCW, has drawn the attention of hedge funds.
The opportunities are there because PCCW's stock and bonds are highly liquid and household names to many investors due to the scarcity of telecommunications companies listed in Hong Kong. 'People follow it anyway and [recent events] just make it that much more interesting,' one hedge fund manager said.
For a long time, the classic arbitrage was to buy Singapore-listed Pacific Century Regional Developments, whose main asset was a 22.66 per cent stake in PCCW.
It has long traded at a discount to its net asset value, so investors bought its shares as a way of boosting the return they would make were PCCW stock to rise in value. To protect themselves, they sold PCCW shares short, so that if they fell, they could buy them back more cheaply, using the profits gained to offset any PCRD stock losses.
PCRD is 75 per cent controlled by PCCW chairman Richard Li Tzar-kai.
That changed on Monday when former Citibank investment banker Francis Leung Pak-to made a surprise $9.2 billion bid for PCRD's shares in Hong Kong's dominant telecommunications operator.
'A lot of people took big chunks of PCRD' at that time thinking it was about to come into a lot of cash, a hedge fund manager said. 'It was a knee-jerk reaction.'
Within hours, the wisdom of that purchase was thrown into doubt when it became known that PCRD was financing 70 per cent of Mr Leung's bid - an offer that was so lacking in financial specifics as to make investors wonder if it should be taken seriously at all. Worse yet, PCRD's shares started falling and by the close yesterday had dropped 55 Singapore cents or 13.3 per cent from Tuesday's close of S$3.75.
Meantime, PCCW's own shares have been tumbling since Mr Leung has apparently thwarted, at least for now, bids by TPG-Newbridge and Macquarie.
That fall caught other funds unaware since many had bought PCCW stock on the strength of the foreign bids. Indeed, some funds were already suffering since the shares had fallen back somewhat once it became reasonably clear that at least some influential officials in Beijing were strongly opposed to both offers.
Funds that bet the mainland opponents would prevail by selling PCCW shares short are so far sitting pretty since the shares have tumbled 11.3 per cent from the peak they reached after word of the two rival offers first surfaced.
Some funds, though, would rather pass. 'It's got Richard Li risk,' said one fund manager. 'Look what he's done to the stock.'
