In a deal that wrong-footed the market, Citic Pacific has agreed to sell its near 8 per cent stake in Hongkong Telecom to Chinese state-controlled Everbright Holdings for $11.39 billion. Trading in Citic Pacific and Telecom shares was suspended before the market opened and observers said they believed this was a prelude to a long-expected deal to bring a mainland company into Telecom as a new shareholder. It had been widely believed that Telecom's British parent, Cable & Wireless (C&W), would sell part of its 59 per cent stake. Citic Pacific said it had agreed in principle to sell its 90.68 million shares (7.7 per cent) in Telecom at $12.60 each - a 16 per cent discount to Thursday's closing price. 'No agreement has yet been signed, and there is no guarantee that the discussions will result in an agreement,' Citic Pacific said. Citic Pacific would have no further stake in Telecom after completion of the deal and its two representatives on the Telecom board will resign. China Everbright, an investment holding company, is one of 16 shareholders in the mainland's second national telecoms operator, China Unicom, and is under direct control of the State Council in Beijing, as is Citic Pacific's parent, Citic Beijing. Citic Pacific managing director Henry Fan Hung-ling described the sale as a purely commercial deal and said the company did not care to whom it sold. The fact that China Everbright was controlled by the State Council was not important, he said. Telecom chairman Brian Smith welcomed the sale. 'This substantial investment of Chinese state capital demonstrates continued confidence in Hongkong Telecom through the 1997 transition and beyond,' he said. Telecom shares resumed trading after lunch and immediately rose. They came off later as dealers sought to understand the significance of the agreement. The shares closed down 50 cents at $14.50 after reaching a high of more than $15.80. Many analysts thought the deal appeared to have more to do with political manoeuvring in Beijing than Telecom's long-term ownership. SBC Warburg analyst Jason Billings offered two theories: putting the shares in China Everbright's hands appeared to bring control of the Telecom stake closer to the State Council and the heart of Chinese decision-making, while the move would seem to raise China Unicom's profile, as one of its shareholders would be closely involved in Telecom. China Unicom, created in 1994, was formed by the State Council to compete with the dominant former monopoly operator run by the Ministry of Posts and Telecommunications. It is well known that the relationship between the ministry and China Unicom has been poor, with the ministry's operational arm, China Telecom, slow to offer interconnect arrangements with Unicom's network. By bringing the Telecom stake closer to Unicom, the State Council could be sending a message to the ministry that it wants to strengthen its competitor. A senior China Unicom official appeared to play down that interpretation, saying China Everbright's potential stake in Telecom had nothing to do with his company. Unicom president Li Huifen on Wednesday made the surprise statement that the company was interested in a stake in Telecom and had been involved in talks. Despite question marks posed by the deal, most commentators believe it could be a prelude to another announcement that will reduce C&W's controlling stake in Telecom in favour of China. Peregrine analyst Craig Racine said: 'I see this as a first step to another transaction - there could be more to come. This deal does not address the main issue.' One rumour circulating yesterday suggested that some form of joint venture between China Unicom and the ministry might come to own up to 18 per cent of Telecom. Analysts believe the ministry, with its dominant influence on the mainland's telephone industry, would be Telecom's preferred partner. Any eventual deal will be judged on its ability to secure Telecom's long-term future in Hong Kong after the handover.
