Nov. 5 (Bloomberg) -- PCCW Ltd. said it will pay Chairman Richard Li and China Network Communications Group Corp. as much as HK$17.6 billion ($2.3 billion) if the two shareholders complete their proposed buyout of the company.

Hong Kong's biggest phone carrier will pay a cash dividend of HK$16.9 billion to HK$17.6 billion to Li's Pacific Century Regional Developments Ltd. and China Network within 20 days after the deal is completed, according to a statement to the city's stock exchange late yesterday. That's as much as HK$2.7 billion more than the HK$14.9 billion buyout offer for the 52 percent of shares Li and China Network don't already own.

``The privatization is not a done deal because there are grounds for the minority investors to be dissatisfied,'' said Alexander Chia, who rates PCCW shares ``hold'' at Standard & Poor's Equity Research in Kuala Lumpur. PCCW will need to explain why it chose to offer the dividend only to Li and China Network, and not to other investors, Chia said.

PCCW shares rose 27 percent to close at HK$3.68 in their first day of trading in Hong Kong since they were halted in mid- October. That's less than the HK$4.20 a share offered by Pacific Century and China Network, reflecting investors' concern that a deal won't win enough support from shareholders.

``The offer is controversial, and there is a fair chance it won't go through,'' said Francis Cheung, head of Asian telecommunications research at CLSA Ltd.

Bloating Debt

The proposed dividend payment to Pacific Century and China Network will increase PCCW's net debt to HK$37.5 billion from about HK$22.6 billion now, Citigroup Inc. analyst Anand Ramachandran wrote in a report today.

PCCW raised a HK$23.8 billion loan from 20 banks in September, which will be used mostly to finance the payout to Li and China Network, according to Ramachandran.

``The proposed privatization will bring about an increase in leverage,'' according to a statement today from Moody's Investors Service, which placed the credit rating of the Hong Kong company's PCCW-HKT Telephone Ltd. unit under review for a possible downgrade. Standard & Poor's said its debt rating on PCCW-HKT is unaffected by the buyout plan.

The proposed dividend to Pacific Century and China Network is about 13 times more than the payout PCCW distributed to shareholders last year. The phone carrier used HK$1.36 billion from full-year earnings of HK$1.84 billion to pay dividends in 2007, according to the company's annual report in March.

Not a `Single Penny'

``Pacific Century and China Network do not need to pay a single penny for the privatization,'' Marvin Lo, an analyst at Daiwa Institute of Research, wrote in a note to investors today.

The decline in PCCW's stock accelerated in the month before the trading halt as the global financial crisis prompted the company to scrap a plan to sell part of its HKT Group Holdings Ltd. unit.

PCCW stock slumped 39 percent between Sept. 12 and Oct. 14, compared with the 13 percent decline in Hong Kong's benchmark Hang Seng Index in that period.

Li and Pacific Century will increase their combined holdings in PCCW to 66 percent if the proposed buyout is completed, with China Network holding the remainder.

Li controls a 28.3 percent stake in PCCW, comprising of personal holdings and a 22.5 percent stake held by Pacific Century, while Beijing-based China Network owns about 20 percent.

Pacific Century shares rose 26 percent to 22 Singapore cents on the Singapore stock exchange today. Li controls more than 76 percent of the investment company, according to Bloomberg data.

In 2006, Pacific Century shareholders rejected Li's plan to sell the Singapore company's stake in PCCW to former Citigroup Inc. banker Francis Leung. The failed HK$9.2 billion transaction valued PCCW shares at HK$6 each.

To contact the reporter on this story: Mark Lee in Hong Kong at wlee37@bloomberg.net

Last Updated: November 5, 2008 07:03 EST