Fixed-line giant believes convergence is inevitable as 3G technology matures but analysts warn of escalating price war The long-anticipated convergence of fixed-line and mobile-telephone services is being cited by PCCW as the key reason for its planned takeover of Sunday Communications, highlighting a potential industry transformation whereby bundles of telephone services will be sold by one provider for a single price. Investors responded negatively to PCCW's planned acquisition of an almost 60 per cent stake in Hong Kong's smallest mobile operator, but the firm defended its return to the mobile market by citing convergence trends and maturing third-generation (3G) technology. 'With this acquisition, we are now equipped for the current trend of fixed-mobile convergence ... we believe 3G technology is maturing so there is less risk [associated with the business],' group managing director Jack So Chak-kwong said. However, analysts pointed instead to a probable intensification of the price war as a result of a takeover of Sunday. 'PCCW's takeover of Sunday could worsen the level of competition in the Hong Kong wireless market given the company's greater financial resources, which could enable it to take up a more aggressive approach on 3G,' ABN Amro analyst Helen Zhu wrote. PCCW shares fell 1.04 per cent to $4.75 yesterday while Sunday rose 18.86 per cent to 63 cents, just below the takeover offer of 65 cents. The $1.16 billion buyout of Sunday's two largest shareholders, Distacom and USI Holdings, due for completion next Wednesday, will trigger a mandatory cash offer for the remaining 40.13 per cent of shares, including an 8 per cent stake held by Huawei Technologies. A takeover of all Sunday shares would cost up to $1.94 billion should the requisite 75 per cent of minority shareholders accept the offer. Mr So sought to generate enthusiasm for the deal by talking up a 'quadruple play' in which PCCW would offer fixed telephony, pay-television, broadband internet and its newly added mobile service. Fixed-mobile convergence involves operators offering seamless services across both fixed and mobile networks and potentially integrating new access technologies such as Wi-Fi, which is emerging in patchwork fashion in coffee shops and airport lounges. A loosening of the regulatory shackles on PCCW opened the way for such developments. The firm was issued a new carrier licence in January that permitted it to discount services and bundle service obligations without needing to gain regulatory approval. PCCW had claimed it was at a disadvantage to its rivals while its incentive to invest fresh capital in the market was diminished. This is supported by the fact that its market share for fixed-line services now stands at 68 per cent, against 77 per cent in the first half of 2003. The Office of the Telecommunications Authority has approved the deal, confirming that it sees no likelihood of reduced market competition from a PCCW takeover of the mobile operator. Analysts still expect Sunday to report a loss this year and next due to its 3G start-up costs. The loss will not be mitigated by a PCCW takeover. CSFB analyst Edison Lee wrote in a report that every $1 billion increase in enterprise value generated by Sunday would add 15 cents to the book valuation of PCCW, highlighting the acquisition should be relatively easily digestible for the fixed-line giant.