The prospect of China Network Communications Group Corp (China Netcom) taking control of Hong Kong's dominant fixed-line carrier appears unlikely because the mainland firm needs to conserve cash to build up its own network.
On Tuesday, PCCW said it was in talks about a possible tie-up with Netcom, which could involve the mainland's second-largest fixed-line operator taking an equity stake in PCCW-Hongkong Telecom (HKT). Some reports have speculated that Netcom might buy all of the Hong Kong business for cash.
Market watchers, however, said such a large and costly transaction - HKT is worth HK$40 billion - would spook potential investors ahead of Netcom's US$1.5 billion initial public offering. 'They would get crucified,' one analyst said.
Paying cash for a partial stake would not make sense either. 'What would be the point of committing significant amounts of cash to buy a non-controlling stake in a non-growth company?' the analyst asked.
Although HKT generates huge cash flows - HK$5.15 billion last year - the business is deteriorating, with the firm's share of the Hong Kong market slipping from 89 per cent in 2000 to 71 per cent now.
ABN Amro analyst Helen Zhu wrote in a research note that Netcom would be cautious about paying too much for an HKT stake, especially ahead of its IPO. 'Eyebrows would certainly be raised if the price paid by Netcom ... is not at a discount to regional developed wire-line comparables.'