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PCCW, Telstra shuffle the pack: PCCW is out and Telstra is in as the Aussie telco takes full control of Hong Kong’s sole profitable mobile provider – New Analysis – Brief Article

PCCW, Telstra shuffle the pack: PCCW is out and Telstra is in as the Aussie telco takes full control of Hong Kong’s sole profitable mobile provider – New Analysis – Brief Article – Statistical Data Included

Robert Clark

In a changing of the guard in Hong Kong telecoms, PCCW has moved out of the mobile sector after two decades, selling out to its regional partner Telstra.

The deal–a non-cash arrangement valued at between $475 million and $529 million–saw Telstra last month acquire the 40% of Hong Kong CSL that it didn’t already own. Under the terms, Telstra will redeem its $750 million convertible bond and will issue the Australian company a new $190 million convertible note.

While Telstra said the move meant it had established a springboard for the rest of Asia, in reality the deal confirmed that CSL is valued at $1.3 billion, some $500 million less than its book value in the carrier’s accounts.

Yet the deal was received positively by Australian analysts and delivered a boost to Telstra’s stock price. It had little impact on PCCW in the market, despite the announcement that it had reduced its debt by more than $600 million to $4.1 billion.

It inevitably set off further speculation about a rationalization of Hong Kong’s over-serviced mobile market, where six operators (four of them with 3G licenses) serve just under 7 million people.

PCCW CEO and chairman Richard Li said the company had no plans to abandon the PCCW-Telstra international joint venture, Reach. Spokesperson Joan Wagner said PCCW is now all about broadband and IT services. To underline this, the Hong Kong company announced in early July an agreement with China Telecom–the incumbent telco for southern China–to service the banking and financial sector in the mainland. PCCW has a similar alliance with China’s number two oil company, SinoPec.

Still in wireless

Despire the sell-off, PCCW is still in the wireless market in Hong Kong, offering WiFi broadband services at more than 100 hotspots at prices of HK$3-4 (39-51 cents) for ten minutes. It has 370,000 broadband customers, representing 5% of the population.

While these are promising markets, they are still small by comparison with CSL, which was last year Hong Kong’s sole profitable cellular company, enjoying EBITDA margins of 31%-32%.

By comparison the IT services division grew 46% in 2001 but to only HK$224 million ($28.7 million). PCCW last month announced a loss of $2.43 billion for the year.

Telstra is sailing better financially, yet the deal marks yet another twist in its offshore strategy. Over the last ten years it has made grand strategic thrusts into new markets–notably Vietnam, India and Indonesia–only to exit with little to show for its efforts. At one point it was even a partner of Hong Kong tycoon Li Ka-shing.

The downside is CSL’s significant capex requirements. Jeremy Matthews of research firm Ovum said it would cost CSL at least $1 billion to roll out a W-CDMA network in Hong Kong, as well as the service development and marketing costs.

It is no wonder that PCCW’s Wagner said the sale meant the carrier “has no exposure to 3G.”

Telstra CEO Ziggy Switkowski unsurprisingly is now targeting the China market. Right now Telstra has a fairly inactive agreement with Unicom and a deal in its early stages with manufacturer Shanghai General Electronics aimed at providing services in China’s biggest city.

An ABNAmro research note to clients says the deal confirms Telstra’s strategy to grow its Asian presence but adds: “We remain cautious on Telstra’s growth prospects.”

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