Updated at 2.50pm: Market sources believe Hong Kong's dominant telecommunications firm is set to sell a stake to China Netcom. The long-expected tie-up between China Network Communications Group and PCCW , due to be announced on Thursday afternoon, will come as little surprise to the market; except that PCCW will earmark most of the proceeds for investment in China instead of repaying debts. China Netcom Group, the parent of Hong Kong listed China Netcom, has agreed to pay $7.9 billion to become PCCW's second-largest shareholder. Contrary to most analysts' expectations, PCCW has earmarked $5 billion for future investment in the mainland telecoms industry with China Netcom Group, according to sources. Most analysts had expected PCCW would use the entire proceeds to repay the company's debts. Sources said the balance of Netcom's $7.9 billion purchase price would be used to repay PCCW's debts. China Netcom Group will pay $5.90 per share, a 25.5 per cent premium to PCCW Wednesday closing price, to acquire 1.34 billion new shares in the Hong Kong company. The shares represent 24.93 per cent of PCCW's issued share capital and 19.95 per cent of PCCW's enlarged share capital, making China Netcom Group the second largest shareholder of the Hong Kong fixed-line carrier. Richard Li Tzar-kai remains PCCW's largest shareholders but his interest in the company will be diluted to about 25 per cent. China Netcom Group will send three directors to join PCCW's board. The members are expected to include chairman Zhang Chunjiang and chief deputy chairman Edward Tian Suning. PCCW has agreed to gradually bring reduce the number of directors from 17 immediately after the transaction to 14 in order to give China Netcom Group a more fair representation at the board. PCCW's board of directors approved the proposed transaction on Tuesday and signed the agreement with China Netcom Group on Wednesday night in Beijing. The Hong Kong Stock Exchange suspended PCCW shares on Thursday, at the request of the company, pending the announcement to be made on Thursday afternoon.
