PCCW bid - comment
5 November 2008
In response to many media requests, here are our brief observations and comments on the Proposal from Pacific Century Regional Developments Ltd (PCRD) and China Network Communications Group Corporation (CNC) to take PCCW Ltd (PCCW, 0008) private by way of a Scheme of Arrangement.
The proposal follows a failed attempt to sell off a 45% interest in HKT Group Holdings Ltd (HKT) to private equity investors.
The Proposal involves an offer at $4.20 per share, a price at which the stock traded as recently as 17-Sep-08. PCRD and CNC (the Consortium) are trying to buy the 52.42% of PCCW which they and Richard Li don't already own, at a cost of HK$14.909bn.
As part of the proposal, HKT would draw down on a Revolving Credit Facility of HK$23.8bn dated 29-Sep-08, which was apparently lined up in connection with the private equity discussions, since it pre-dates the suspension for the Proposal. This would be used to repay existing facilities of $16.6bn and transfer at least $7.02bn up to PCCW, which would then have at least $12.675bn available for distribution.
The Proposal involves a dividend of between HK$16.964bn and HK$17.565bn to be declared to the post-Scheme shareholders within 20 days of the Effective Date of the Scheme, of which not more than $4.289bn may be deferred for up to 12 months. It's not clear why there is a range of dividends, but if you subtract the maximum deferral from the lower amount of the dividend range then you get $12.675bn, the exact minimum amount available as a result of the Revolving Credit Facility. Any deferred amount carries interest at LIBOR+1.5%.
The minimum initial dividend payment is equivalent to about $1.87 per PCCW share. The maximum total dividend is equivalent to $2.59 per PCCW share.
PCCW and the PCRD/Li group currently hold shares in the ratio of about 58.31:41.69, but the offer is being made by PCRD and CNC in the ratio of 74.27:25.73 - in other words, CNC is putting up proportionately less of the bid money. This is clearly arranged so that CNC would have a 33.33% (one third) interest in PCCW after the Scheme. PCRD has a funding facility arranged by HSBC, while CNC has a facility arranged by Bank of China (Hong Kong) Ltd.
At the offer price of $4.20, CNC's share of the cost would be $3.836bn. But the initial dividend payment of $12.675bn would give them $4.224bn, which is 10.1% more than their cost (ignoring expenses). We suspect that one of the difficulties in structuring this deal was to come up with a scheme in which CNC would be at least cash neutral. This indicates that there is scope to increase the offer by 10.1% to about $4.62 per share, in which case CNC's share would be $4.224bn, equal to CNC's share of the initial dividend. If you were to include the deferred portion of the dividend, then there is scope for a much larger increase.
We note that the Consortium has not ruled out an increase in the offer, known as a "no increase statement" under the Takeover Code.
The offer will be blocked if 10% of the minority shares (about 5.2% of PCCW) vote against it. Our view is that this offer will not succeed at $4.20, and that they have deliberately left room for an increase, hoping that hedge funds will move in and deliver the deal to them for the "pop" in the offer price.
Shareholders must be asking themselves: "if PCCW can afford to declare a dividend of $2.59 per share, then why don't they just do it and we'll take that and keep our shares in a leveraged company?"
© Webb-site.com, 2008
Organisations in this story
- CHINA NETCOM GROUP CORPORATION (HONG KONG) LIMITED
- Pacific Century Regional Developments Limited
- PCCW LIMITED
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