Hong Kong's Dotcom Bubble Boy Is Back, This Time In Macquarie's Sights
The Age
Wednesday June 21, 2006
REPORTS that Macquarie Bank has approached Hong Kong's PCCW with an offer to acquire its telecommunications and media interests for something approaching $7 billion, if they prove correct, suggest that the bank's media strategy is developing real momentum and aggression. They also suggest that, regardless of the outcome, PCCW's founder, the much-maligned Richard Li, is close to being vindicated.
Li, the second son of Hong Kong billionaire Li Ka-Shing, founded PCCW as an internet business in 1999. In a much-misunderstood transaction in 2000 (one of several, including the controversial dealings with Telstra the market has struggled to appreciate), Li swapped dotcom-bubble inflated paper for Cable & Wireless' Hong Kong Telecom operations, which included the dominant fixed-line business in Hong Kong.He subsequently did the ill-fated transactions with Telstra: the CSL wireless joint venture in Hong Kong now owned by Telstra; and the Reach IP backbone joint venture, which was restructured several times at huge apparent cost to Telstra and PCCW as the inflated values at which their assets were vended into Reach were unwound.Li's vision was to create an internet-based telco. It seems he is on the verge of success, leveraging off the dominance of the former Cable & Wireless fixed network, which controls about 68 per cent of the fixed-line market in Hong Kong.As Hong Kong has no anti-siphoning legislation, Li has been able to secure a series of exclusive deals for core sport and movie programming. The IPTV strategy has been so successful that last year PCCW did something that few fixed-line telcos in the world have achieved - it arrested the decline in its fixed-line subscriber base. Since June last year PCCW has been adding net subscribers each month.With its interest in the separately listed Sunday wireless business, PCCW is one of the few fixed-line incumbents in the world able to offer traditional fixed-line, broadband, pay TV and wireless services.For Macquarie, PCCW's success in creating a "quadruple-play" business model would be intriguing, not only because it represents a resilient model capable of being financially and operationally leveraged and therefore fits the bank's acquisition criteria but because Macquarie itself is pursuing an analogous strategy with one of its own recent acquisitions.Last month the bank and its Macquarie Media satellite closed the $1.3 billion deal to buy Taiwan Broadband Communications, one of the leading cable operators in Taiwan. TBC, the sole provider of cable TV in its licence areas, also offers broadband and telephony services.A core element of Macquarie Media's strategy is to increase the bundling of those services. The PCCW model of bundling seems as advanced and as successful as that of any big player in the globe thanks largely to the success of the IPTV strategy.With PCCW's share price flatlining for the past 31/2 years at about a fifth of its peak in early 2000, Li may be receptive to an attractive offer, although it would mean walking away from his vision, after a lot of trauma, even as it was being realised. Only recently, however, Li rejected an approach from private equity player Newbridge Capital, which (unlike Macquarie, which is said to be after the underlying assets) wanted to acquire a stake in his holding company.The fact that PCCW said, in a statement to the Hong Kong exchange, that it considered it was in the best interests of the company and its shareholders that it continue discussions on the proposed transaction with the "independent third party" that had approached it, suggests that Macquarie - if, indeed, the third party is Macquarie - is in with some chance of success. The bank is usually prepared to pay top dollar for assets that fit its criteria.Even by Macquarie standards, a deal with PCCW would be a big-ticket deal, although not beyond the capacity of the bank and its media-focused funds, Macquarie Media and Macquarie Communications Infrastructure Group.As it faces increasing competition for traditional infrastructure assets, however, the bank will be pushed up the risk curve, entertaining larger transactions that involve greater levels of operational risk and reward.TATTERSALL'S plea to Graeme Samuel to block Tabcorp's rival bid for Unitab signals that Tatts doesn't have either the capacity or the appetite to outbid Tabcorp. As it stands, Tabcorp's bid for Unitab offers greater value to Unitab shareholders than does Tatts' "merger of equals" proposal, along with reduced risk. In the absence of a better offer from Tatt's, Tabcorp will almost certainly prevail.The Australian Competition and Consumer Commission represents Tabcorp's biggest obstacle but, having previously determined that totalisators are regulated, state-based monopolies, it would be difficult for the ACCC to now decide that Tabcorp's acquisition of Unitab would substantially lessen competition.Tatts' argument that a combined Tabcorp and Unitab would reduce competition for Tabcorp's wagering licence in Victoria could just as easily be turned against it - a combined Tatts/Unitab would reduce competition for Tatts' gaming licence - and in any event there are other prospective bidders for both licences.bartho@theage.com.au
© 2006 The Age