Cable & Wireless' Raw Deal

Cable & Wireless (C&W) selected a cash and stock deal from upstart Pacific Century Cyberworks (PCCW) in February for $35 billion in cash and stock for its Hong Kong Telecom subsidiary. There was also a deal on the table from Singapore Telecom for a lower amount, but the PCCW bid and mystique won out. So C&W, which was trying to raise cash and exit Hong Kong, ended up a large shareholder in an ambitious company with big ideas, big debt, and minimal assets save the carrier just sold to it by C&W. Now, seven months later, C&W's take from the deal is significantly below the then market price of Hong Kong Tel, as PCCW's buoyant stock has tanked.

By Bill Mann (TMF Otter)
September 22, 2000

From the files of "I knew it, I knew it":

Yesterday Cable & Wireless (NYSE: CWP) announced that it was selling a 4.9% stake in Pacific Century Cyberworks (NYSE: PCW) at a market price of about HK$9.88 per share (U.S.$1.28), for a total of U.S.$1.3 billion. Cable & Wireless still holds approximately 15.3% of PCCW as a result of PCCW's purchase of Hong Kong Telecom from Cable & Wireless in August.

The deal between the two companies was part cash and part stock, with Cable & Wireless getting U.S.$11.3 billion in cash plus a stake in PCCW that turned out to be 21.4%. C&W then flipped a small portion of its PCCW stake in a stock swap with CMGI (Nasdaq: CMGI) for its shares, leaving it with a 20.2% stake. The trouble is, shares in PCCW have fallen so fast since the deal was inked in February that Cable & Wireless' current yield is 23% less than the market price for Hong Kong Tel as of the market close on the day the deal was announced. PCCW's shares have dropped from HK$26.35 per share (U.S.$3.41) down to HK$8.81 (U.S.$1.14) as the euphoria that surrounded it has dulled significantly.

I wish I hadn't seen this coming. At the time of the PCCW deal, there was another offer to Cable & Wireless on the table from Singapore Telecom. Although PCCW's plans were ambitious, the company had little in the way of revenues or of assets to back up its proposal to take over the former monopoly carrier of Hong Kong, which C&W was trying to sell. Nothing except for its fluffed-up stock certificates, made buoyant by the combination of a magical name (founder Richard Li), an audacious business plan involving the Internet and Asia, some pretty sweet deals from the Hong Kong government, and an investing public dying to believe.

C&W was trying to get out of Hong Kong. It should have taken the cash deal from SingTel. But no, it was bedazzled by the same sparkle that helped PCCW catch the fancy of the market. And so it took a cash and stock deal with limitations on when it could sell the stock. But when would C&W possibly find reason to sell such a fantastic opportunity as ownership in PCCW?

Not soon enough, apparently. C&W has embargoes placed on its sale of the PCCW stock, with the first 25% having just unlocked. C&W wasted no time at all to unload it. This leaves another 15% of all available PCCW shares in the hands of a company that is now demonstrably a motivated seller -- a situation that is bad for both parties. Half of the remaining shares unlock in February 2001, the remainder six months after that.

As a Cable & Wireless shareholder, I stated from the outset that it should take the bird in hand -- SingTel's cash. Instead, we're now loaded down with a bunch of PCCW funny money stock, with PCCW loaded down with debt from the transaction, debt assumed from Hong Kong Tel, and the debt it has incurred to start up its own business.

Something tells me this story's going to get uglier before it gets better. Those who are deeply interested in a skeptic's take on the PCCW saga should check out the recent article about it at Webb-site, which is run by a former investment banker based in Hong Kong who has a passion for good corporate governance. Very Foolish!

Your Turn:
We have a couple of places to send up thoughts on this move by Cable & Wireless, most appropriate is the C&W discussion board, but those with a take on the Webb-site piece may also weigh in at the Pacific Century Cyberworks board.

Related Links:
As Hong Kong Telecom Turns, Fool on the Hill, 4/28/00
CyberWorks dives after C&W sale, CBS Marketwatch, 9/21/00