Forum Archive Index - October 2000

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

>
> What do any of you more analytical types make of the revised deal ?
> TLS > NZ =  -- .20 TLS > AU = + .10 Thanks in adv.
> 
I think it might be time to call in Frank Fernandez, who seems to 
follow this company, to make sense of it all ;-)!

However, in Frank's absence I'll try and give you my 'snoopshot' of 
the situation.  I doubt if anyone in New Zealand had time to come to 
grips with the deal before the market closed on Friday, so I would 
take the Australian reaction (mildly positive for TLS) to be a good 
summary of what the market thinks.

There is a very good website on all of this, first brought to my 
attention by Marilyn M at:

http://www.webb-site.com/articles/finalcut.htm

It is written from a Hong Kong PCCW perspective, not a Telstra one, 
but reading between the lines and the figures you can get a lot of 
the implications for Telstra out of it.  A brief outline of the deal 
as I see it is this:

1/ Telstra has acquired a 60% stake in HKT (Hong Kong Telecom), soon 
to be renamed PCCW (Pacific Century Cyber Works) run by Hong Kong 
entrepreneur Richard Li.  Cost $A3.36billion. 

2/ Telstra and PCCW will pool their wholesale connectivity services  
into an 'Internet Protocol Backbone Company' (IPBC) a 50/50 owned 
joint venture.   The plan is to go to the Hong Kong sharemarket and 
ask for more money to fund this via a share float.  In the meantime 
it is a convenient vehicle for Telstra to hide $A2billion 
(a 50% share of the $US2billion) worth of debt that it pretends it 
doesn't have.

3/ Telstra has given PCCW, in effect, an additional rolling loan of 
$A1.5billion.  But the loan will not be paid back in cash, unless 
PCCW does rather well (share price up over 35% total in six 
years).  Instead it is likely to covert to more PCCW shares for 
Telstra in two stages, one half four years into the future, and the 
other half six years into the future (provided PCCW share price 
growth increases by no more than 35% over 6 years -around 5% per year 
average).  Exactly how much more of PCCW, Telstra gets depends on the 
performance of PCCW over this time-frame.  If PCCW does slightly 
better than expected, then Telstra shareholders will get these extra 
PCCW shares at a prelocked in price that will be a bargain.   If PCCW 
does worse than expected, then Telstra may still have to the PCCW 
shares as payment, but at a higher than market price, creating an 
immediate paper loss.  If the current share price of $HK7.65 for 
PCCW stays flat, then Telstra will pick up somewhere around 18% of 
the rest of the diluted share capital, which when added to the (now 
diluted) 47% they already own, gives them 65% of HKT (assuming no 
further capital is raised in the interim).

The Hong Kong partner, Richard Li of PCCW, is not Telco man, so it is 
somewhat gratifying to see Telstra firmly in charge of the Mobile 
Phone Business, even if it did cost them $A6.86billion.  But did it 
cost them that 'little'?   The third generation cellphone spectrums 
for Hong Kong have yet to be auctioned, so it remains to be seen how 
much of that PCCW gets, and how much Telstra (through their 60% 
shareholding in PCCW) have to pay for it.

And do Telstra have control of 'Hong Kong Telecom'?  Ordinarily, if 
anyone had a 60% shareholding in a company I would say yes.

I note in a previous PCCW press release that:
"Both parties are to have equal board representation and management 
rights notwithstanding their economic interests until the business is 
floated."

Businesses do seem to have different rules in China.  Maybe Li 
hasn't been reduced to the role of a shareholding bystander just yet! 
There does seem to be some hint that HKT will partially be refloated 
into public hands.

Telstra has paid a high price to get into the Hong Kong mobile 
market.  US$3,000 per customer is less than the $US4,000 first 
mooted, but it is 3 to 5 times the going rate of similar sales of 
-admittedly weaker- competitors.   Yes, Telstra can afford it, but 
whether it is a good deal or not depends on how much Telstra has to 
pay for access to the 3G mobile phone frequencies, and this is 
completely unknown at this time.   That's as I see it. 
SNOOPY


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