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Is Macquarie Bank Bidding for PCCW?

For a second-generation tycoon like Richard Li, Hong Kong has always been too small a stage. Li is the younger son of billionaire Li Ka-shing, the legendary Hong Kong dealmaker whose telecom, ports, property, and retail empire extends from Beijing to Tel Aviv and from London to the Panama Canal. Richard, who turns 40 in November, doesn't have a role at his father's company, where older brother Victor is clearly No. 2 and positioned to take control after his father.

So for the past 15 years, Richard has been trying to build a business of his own with a similar kind of reach. He started in the early 1990s with Star TV, a satellite television network focusing on Asia that he sold a few years later to News Corp. (NWS). During the Internet bubble, he fashioned a number of deals with the goal of turning his new company, PCCW (PCW), into Asia's leading Net company. The deal-making culminated in the acquisition in 2000 of Hong Kong's biggest telecom operator, Hong Kong Telecom, from Britain's Cable&Wireless for $28 billion.

But the collapse of the Internet bubble made Li scale back his regional ambitions, and he has focused largely on Hong Kong ever since. He and his executives have patiently reduced the company's debt load, from $12 billion at the time of the Hong Kong Telecom takeover to about $3 billion. To do that, they've sold off assets, including Hong Kong's No. 2 cellular operator to Australia's Telstra (TLS). Now comes possibly the biggest sale of all—possibly to another buyer from Down Under.

PROBABLE SPIN-OFF.On June 19, PCCW revealed that it has received a bid for its fixed-line, cellular, and pay-TV assets. PCCW won't comment on media reports that Australia's Macquarie Bank (MQBKF) is the would-be buyer—or that the Aussies are looking to pay about $5 billion for the assets. However, PCCW did say that the bid, wherever it's from, is not a hostile one and that the company "is evaluating the proposal."

The news clearly took investors by surprise. PCCW's stock, which has been in the doldrums for years, jumped 8% on Tuesday. If Macquarie were the bidder and the deal were to proceed, then the PCCW telecom assets probably would end up in a trust with several other telecom and media-related assets controlled by the Australian investment bank. Macquarie would probably then spin it off and give stock market investors the chance to buy stakes.

PCCW's fixed-line business, like that of other telecom operators worldwide, is struggling, but the Macquarie model would make sense, says Christopher Lee, an analyst with Standard & Poor's Equity Research in Hong Kong. (S&P, like BusinessWeek, is owned by the McGraw-Hill Companies (MHP).) "It's a stable, cash-flow business," he explains. "Sure, fixed-line is no-growth but it generates cash flow with little fixed costs." A buyer "can leverage it to the hilt."

NOWHERE TO GROW.With PCCW not providing much in the way of details about the possible deal, it's hard to say where all of this would leave Li. He has hinted in the past that he's not satisfied running a company that is largely limited to its Hong Kong home. PCCW is the world leader in providing pay-TV services over telephone lines, using technology called IPTV (Internet protocol television). The company's NOW Broadband service, launched in 2003, has 550,000 subscribers, more than any other IPTV operator.

That's a reflection not only of PCCW's tech prowess, but also of the early start it had in IPTV, as bigger operators with bigger footprints in larger countries have taken longer to get their services up and running. I interviewed Li last year and he sounded a bit frustrated even as he boasted of having dozens and dozens of channels. "We are lucky to have 100 channels," he said. "We are not lucky that we only have six million people [in Hong Kong]. We don't have a strong growth story."

SOMETHING DIFFERENT. However, just across the border there's a market with 1.3 billion people. In order to break out of Hong Kong, Li last year sold 20% of PCCW to China Netcom, the state-owned fixed-line operator, for $1 billion. That was supposed to make it easier for PCCW to start expanding in China. "What investors want is growth," Li said last year. "They want to see us having a solid growth path." PCCW and Netcom have a joint venture that is conducting IPTV trials in two eastern Chinese cities, Ningbo and Hangzhou.

China's regulators have taken a very cautious approach to IPTV, though, since anything connected to television in China is extremely sensitive—for fairly obvious political reasons. It won't be easy for a foreign company, even one as well-connected as PCCW, to operate an IPTV service in the country. Maybe Richard Li has decided that it's time to try something else.

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