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SCMP Reporter

Li Ka-shing donates HK$4b to ease son's exit from troubled telecoms giant

An arrangement between Li Ka-shing, Francis Leung Pak-to and Spain's Telefonica to buy Richard Li Tzar-kai's 23 per cent stake in PCCW will likely result in China Network Communications Group, the mainland's No 2 fixed-line phone operator, becoming PCCW's controlling shareholder, people close to the deal revealed yesterday.

Li Ka-shing will make a donation of HK$4.04 billion to the Li Ka Shing Foundation in Hong Kong to let it buy 10 per cent of PCCW, and the foundation's Canadian arm will acquire 2 per cent, for a combined outlay of HK$4.85 billion.

Mr Leung, a banker closely associated with the tycoon, will buy a further 2.65 per cent of  PCCW, on top of the 0.7 per cent he owns now, using his own funds, bank financing - and a loan from Li Ka-shing.

Some sceptics believe the elder Mr Li has been pulling the strings ever since his younger son, Richard, announced in July that he wanted to exit PCCW, a company he created out of the former Hongkong Telecom in 2000, by selling to foreign investors.

China Network, which has owned 20 per cent of PCCW since January 2005, immediately said it was opposed to the company falling into foreign hands.

Since last year, however, China Network has had its own foreign ally, Telefonica, which is now seen swapping an 8 per cent stake in PCCW for shares in the mainland firm's Hong Kong-listed unit China Netcom.

Amid the dispute between Richard Li and China Network, Mr Leung announced in July plans to assemble a consortium to acquire the 23 per cent PCCW stake for HK$9.2 billion, or HK$6 per share.

Under the agreement unveiled yesterday, the new shareholding structure must be confirmed by December 20. If not completed by January 7, the deal will lapse.

However, the transaction depends upon approval by minority shareholders of Pacific Century Regional Developments, the Singapore-listed firm through which Richard Li controls PCCW. PCRD owners are scheduled to vote on the sale on November 30.

Telefonica, Spain's biggest telecom firm, will pay 323 million euros - equivalent to HK$6 per share - for its 8 per cent holding in PCCW, although it could get a 10 per cent discount, depending on PCCW's share performance within 10 months of the transaction's completion.

The Spanish firm formed a relationship with China Network last year, acquiring 5 per cent of China Netcom. China Network and Telefonica will transfer their combined 28 per cent interest in PCCW into a new company, which will be PCCW's largest shareholder.

But Telefonica said in a statement it had the right to swap its PCCW shares for shares in China Netcom, consistent with an existing agreement whereby Telefonica was entitled to boost its stake in China Netcom to 9.9 per cent.

'This political arrangement paves the way for China Network to fully consolidate with PCCW in the future,' a source said yesterday.

'China Network always wanted a bigger stake in PCCW, but the Chinese government only allowed them 20 per cent initially,' another source said. 'The full consolidation of PCCW and China Network should help PCCW to participate in the growth of the mainland market.'

Separately, China Network, Telefonica and PCCW reached a non-binding memorandum of understanding to jointly explore other areas of telecoms and media, such as Internet protocol television and international wholesale services.

However, this arrangement may have to wait until late 2008, when China is committed to open its telecoms market more widely to foreign investors. By then, foreigners should be allowed to own up to 49 per cent of fixed-line operators such as China Network. Now, foreigners can own up to 35 per cent.

The source said the Hong Kong government would probably not object to China Network becoming PCCW's controlling shareholder. '[It] has an open mind on this.'



Deal 'will give China Network control of PCCW'