UPDATE: CyberWorks Details C&W HKT Merger Offer

HONG KONG (03/01/2000) - Pacific Century CyberWorks Ltd. (PCCW) yesterday outlined its plan to merge with Cable & Wireless HKT Ltd. and use the assets of Hong Kong's incumbent carrier as a springboard to build broadband services more quickly worldwide.

A representative of the high-flying Internet investment company today said the board of C&W HKT has approved the offer, which values the Hong Kong carrier at between US$36 billion and $38 billion.

PCCW said it plans to leverage C&W HKT's local infrastructure and high-speed links out of Hong Kong, its experience with a broad range of network technologies and its customer base, as well as billing and other support systems, to help kick off broadband data and voice services across Asia.

PCCW is offering C&W HKT shareholders two options: 1.10 new PCCW shares for each C&W HKT share, or 0.7116 new PCCW shares and $0.92 in cash per C&W HKT share. If regulators approve the merger, a new company called PCCW-HKT will be formed, with an estimated market capitalization of $70 billion, according to analysts familiar with the companies.

Richard Li, the chairman of PCCW, and his associates will hold more than 30 percent of the company, while Cable & Wireless will own approximately 20 percent, analysts said. Other significant shareholders will include Intel Corp., which already has a stake in PCCW, and China Telecom, China's state-controlled carrier.

The deal ends a weeks-long drama that saw Hong Kong's main telecommunications provider courted by Singapore Telecommunications Ltd. (SingTel) -- majority-owned by a Singapore government-owned enterprise -- and concerns raised by some Hong Kong legislators over foreign ownership.

Yesterday, a top government official denied the Hong Kong or Beijing governments had influenced the decision by C&W HKT and its parent, U.K.-based Cable & Wireless PLC, to choose the local offer.

"The government has no view on which party should or should not merge with Hong Kong Telecom," said Chief Secretary for Administration Anson Chan, according to a government transcript.

"In this matter, we have not received any direction, nor do we expect to receive any direction, nor have we received any intervention from the Central Government," Chan added.

PCCW entered the fray on Feb. 12 and proposed what some observers considered a questionable fit between an established telecom carrier and an Internet start-up with big ideas but no real businesses yet. Some observers said the start-up might be trading in its high-priced shares for a more solid company in case opinion on Internet shares turns down.

SingTel yesterday withdrew its bid for C&W HKT following an apparent rejection by its parent company. Despite the cancellation of a planned investment of $1 billion by News Corp. to help SingTel make the deal happen, the two companies said yesterday they will proceed with a partnership for regional broadband services. [See "SingTel & News Corp. Venture On, But $1B Gone," Feb. 29.]In its statement, PCCW said C&W HKT's experience and engineering teams in a variety of delivery technologies will help the company roll out services quickly throughout Asia, a region in which penetration of broadband is low and fragmented. It plans to use Hong Kong as a base from which to roll out services via satellite, cable, fixed wireless, DSL (Digital Subscriber Line), fixed line, and mobile wireless technologies, as well as future technologies such as third-generation wireless mobile.

The company also pointed to C&W HKT's regional and global connectivity -- 44G bits per second (bps) of total capacity, including 71M bps to China and 425M bps links to the U.S., and two large satellite earth stations -- as a platform for delivering services from a Hong Kong base.

Analysts said the carrier could be a good fit for PCCW, which boasts ideas and a stable of content partners but little infrastructure or revenue.

"(C&W HKT has) a stable cash flow, and they have a lot of telco experience in the broadband business," said Kary Sei, an analyst at Sassoon Securities, in Hong Kong, who has been researching PCCW. Where PCCW has concentrated on delivery over cable TV networks, the carrier can bring in other technologies, he said.

Analysts said C&W HKT's solid customer base, infrastructure, and technical expertise could help PCCW move forward on its plans for broadband data services.

"PCCW will buy an existing, mature operation and lock in a large, stable customer base," said Vivian Kwok, a telecom analyst at Sassoon Securities. The expertise of the company's Interactive Multimedia Service (IMS) division is likely to be another major asset gained, Kwok said.

PCCW's aim to provide broadband multimedia across Asia will bring it up against the allied SingTel and News Corp., analysts predicted.

"HKT and SingTel will remain in a high degree of competition to provide services in the region. There's no clear winners or losers, it's an ongoing competition," said Geoff Johnson, a telecommunications analyst at Gartner Group Inc., in Australia.

The PCCW-HKT merger may bolster Hong Kong's bid to bring e-commerce and other Internet-based services in Asia, Johnson added.

"E-business will take a big step forward with PCCW taking over HKT," Johnson said. "For Hong Kong, you'll see potentially much more investment and business activity in e-business, because you have a synergy between PCCW with its clicks and HKT with its bricks."

However, both Johnson and Sei said the potential broadband market in most of Asia remains nearly wide open.

"Even with these two parties coming into the market, there is room for both of them," Sei said.

C&W HKT, in Hong Kong, can be reached via the Web at http://www.hkt.com/. PCCW, also in Hong Kong, is at http://www.pcg-group.com/. Singapore Telecommunications, in Singapore, is at http://www.singtel.com/.

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