Private equity funds bidding for a 45 per cent stake in PCCW's telecommunications and media subsidiary HKT Group Holdings may propose offers as low as two-thirds of the minimum price because of the global credit crunch and PCCW's plunging share price, market sources say. PCCW's reserve price, or the minimum valuation, for the unit was set at US$8 billion, including US$5 billion in debt the group has arranged and US$3 billion in equity, sources said. That implies a US$1.35 billion floor price for the 45 per cent stake. However, bids due at the end of next week were likely to value HKT at between US$7 billion and US$7.5 billion, which will set the price of the stake at US$900 million to US$1.13 billion, the sources said. At the time shortlisting and before serious due diligence began, some market observers estimated the deal value at as much as US$2.5 billion. Seven funds, namely Bain Capital, Carlyle Group, Apax Partners, Macquarie, TPG, Providence Equity Partners and MBK Partners, were shortlisted in August. Funds had planned to borrow against the share dividends they would earn, but global credit markets have become much more challenging and expensive in the wake of the ongoing banking crisis that has seen some of Wall Street's biggest names go bankrupt or get bought out. In a typical buyout deal, private equity firms would borrow against the company's cash flows, but that tactic is not possible in the PCCW deal because the sale is of a minority stake. Funds had expected to borrow as much as 40 per cent of the bid but instead will have to stump up much more of their own cash. That will be particularly onerous for the smaller funds and is likely to knock some funds out of the race if they cannot find a partner. PCCW said on September 12 the winning bidder would have priority over other investors on the dividends until 2013 to keep price tension in the deal. A week later, it said the sale was proceeding 'as contemplated'. The company's collapsing share price is also dragging potential bids down. PCCW's shares closed at HK$2.93 on Friday, about HK$2 below their price in mid-July when the first round of bidding began. Should the bids come in below the US$8 billion reserve price, PCCW management and chairman Richard Li Tzar-kai would either have to accept the lower valuation or pull the deal. PCCW set up HKT earlier this year to hold the core assets of the fixed-line, media and information-technology businesses. The firm said the move was to improve operational efficiencies and pave the way for fund-raising, without specifying where the proceeds would go. Now TV, Hong Kong's No1 pay-television service, is considered the HKT asset with the most growth potential. The winning bidder is widely expected to spin off that business in an initial public offering. The deal is a scaled-back version of an attempted sale to private equity funds two years ago. At that time, TPG and Macquarie fought over a transaction as large as HK$60 billion that would have seen the winner gain control of PCCW. Beijing foiled the deal as it did not want to see the firm controlled by an overseas player. It then endorsed a consortium, led by investment banker Francis Leung Pak-to and including China Netcom Group Corp and Mr Li's father, Li Ka-shing, to acquire about 23 per cent of PCCW held by Singapore-listed Pacific Century Regional Developments. But PCRD minority shareholders rejected the offer.