PACIFIC CENTURY CYBERWORKS LIMITED: THE BID FOR CABLE & WIRELESS HKT LIMITED
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HKU173
SU HAN CHAN
KO WANG
PACIFIC CENTURY CYBERWORKS LIMITED:
THE BID FOR CABLE & WIRELESS HKT LIMITED
It was a hastily arranged lunch in late January 2000. Fang Fenglei, Chief Executive of Bank
of China International, and two senior executives from China Telecom (Hong Kong), were
having serious discussions with a visionary, big-thinking young man in Hong Kong over a
proposed merger of equals between Cable & Wireless HKT Limited (“HKT”) and Singapore
Telecommunications (“SingTel”). As a Chief Representative of the Chinese state-run bank’s
investment banking arm in Hong Kong, Fang was far more than an aggressive deal maker
who had successfully managed the initial public offering of China Telecom (Hong Kong) in
1997. He was perceived by the young man as being particularly close to the seat of power in
Beijing. Through his peculiar connections, Fang might have known of Beijing’s attitude to
SingTel’s bid for HKT.
As the group tucked into their soup, Fang prompted the young man to consider launching a
rival bid for HKT. He cited what he called ‘the strong negative reaction of the Hong Kong
people” to SingTel’s bid for the leading telecommunications company in Hong Kong.1 The
young man did not express an opinion, as he thought launching a rival bid “would be too big”
for his company.2
The young man was Richard Li Tzar-kai, the 33-year-old son of the property tycoon Li Ka-
shing, who controlled two of Hong Kong’s biggest conglomerates, Cheung Kong and
Hutchison Whampoa, and was said to collect six cents from every dollar spent in Hong Kong.
Li Ka-shing, one of the top advisors to Deng Xiaoping in China before the handover of Hong
Kong in 1997, was often seen as having unparalleled connections with Beijing. His son
1
Gilley, B., “Working Lunch”, Far Eastern Economic Review, 30 March, 2000.
2
Gilley, B., (2000).
Mary Ho prepared this Case under the supervision of Prof. Su Han Chan and Prof. Ko Wang for class discussion. This Case can
be used in conjunction with “The Divestiture of Cable & Wireless HKT Limited” and “Singapore Telecommunications Limited:
The Bid for Cable & Wireless HKT Limited” in a bilateral/trilateral negotiation exercise. This Case is not intended to show
effective or ineffective handling of decision or business processes.
This Case is part of a project funded by a teaching development grant from the University Grants Committee (UGC) of Hong
Kong.
© 2002 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or
transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise (including the Internet)
- without the permission of The University of Hong Kong.
Ref. 00/72C 24 January, 2002
100/72C Pacific Century CyberWorks Limited: The Bid for Cable & Wireless HKT Limited
Richard had apparently inherited the personal connections that his father had always smartly
manoeuvred. In recent years, Richard tagged along with his father in meetings with the top
Chinese leaders Zhu Rongji and Jiang Zemin.
The powerful connections of the Li family were reflected in the decor of Richard Li’s
sumptuous corporate dining room at his headquarters. Hanging on the wall were photographs
of his father with the old powerful leaders, ranging from Margaret Thatcher to Lee Kuan
Yew, the former Prime Minister of Singapore. Lee Kuan Yew was a respected friend of the
Li family. Challenging SingTel’s bid for HKT would mean that Richard had to snatch the
prize from the grasp of Lee Hsien Yang ⎯ the President and CEO of SingTel and the son of
his respected friend. If he did this, what would be the value added to his Internet startup
Pacific Century CyberWorks Limited (“PCCW”)?
Despite initial misgivings, Richard Li was receptive to Fang’s idea. A few hours after the
lunch, Richard had to leave for Switzerland to attend the World Economic Forum. Before he
left, however, Richard asked Francis Yuen, vice-chairman of PCCW and Mico Chung,
executive director of PCCW, to consider the possibility of launching the biggest rival bid in
Hong Kong’s business history.
PCCW
Unlike his father, who founded the family’s fortune on the old economy of property, ports and
telecommunications, Richard Li was determined to blow up the old order in Asia by building
an Internet empire through his company, PCCW. Incorporated in April 1979, PCCW,
formerly known as Tricom Holdings Ltd, commenced business as a systems house
specialising in the distribution and marketing of telecommunications products. Though the
company became listed in 1994, it did not attract the attention of investors until Richard Li
purchased it as a backdoor listing vehicle through Pacific Century Group (“PCG”) in mid-
1999.3 Subsequent to the acquisition, Tricom Holdings was renamed as PCCW on 3 August,
1999, and several of PCG’s Hong Kong and mainland investment and development properties
were injected into the company.
In December 1999, PCCW sealed a deal with the Hong Kong Government to build a
HK$15.8 billion high-tech centre known as the Cyberport. The deal triggered a storm of
protest as Richard Li got the prize from the Government without competitive bidding.
Following the controversial deal, the stocks of PCCW were keenly sought after by investors,
who believed that the deal added a high-tech element to the company. The stock rocketed
from a low of HK$2.8 in August 1999 to a dizzy high of HK$19.5 in late December 1999.
The high-tech project Cyberport also sparked a torrent of dot-com startups in Hong Kong.
Exhibits 1A and B show the stock price performance of PCCW from 1998 to 2000 and the
market valuation as at the end of January 2000.
Since mid-1999, PCCW had been “doing Internet deals at the rate of about once a week”.4 In
early 2000, PCCW had become a leading Internet company in Asia. It was engaged in
technology business relating to the Internet and the delivery of broadband ISP-enabling
services and technologies. The astute deal-making ability of its Executive Chairman Richard
3
Backdoor listings shorten the timetable for the listing process. It is an option for companies that do not intend to go through
initial public offerings but want to have their companies publicly listed. Backdoor listings involve buying a majority stake in
listed firms that have relatively few traded shares (which are often called shell companies) and injecting assets into them.
Backdoor listings may not initially raise funds for the companies but they do create the opportunity for them to quickly raise
equity at a later date through a share placement.
4
Snoddy, R., “Pacific in battle for control of C&W HKT”, The Times (London), 12 February, 2000.
200/72C Pacific Century CyberWorks Limited: The Bid for Cable & Wireless HKT Limited
Li had turned the company into one of the most preferred partners for regional and
international Internet and technology-related companies.
Financial Position
PCCW’s financial statements for the years 1995 to 1999 are presented in Exhibits 2 and 3.
As at 31 December, 1999, the group was cash-rich and had a low gearing. Its operations were
mainly financed by cash, short-term borrowings and convertible bonds.
Despite having a strong cash position, PCCW’s financial results were not very impressive. In
the year 1999, the group reported net profits of HK$347 million. Following the restructuring
of the group’s business, reliance on service-based projects was significantly reduced.
However, excluding the investment gains on certain listed securities that were classified as
other investments (HK$37.1 million was realised and HK$537.2 was unrealised), the group
had actually suffered a loss of HK$228 million. If the group was to finance its investments in
the Internet and technology-related businesses in Asia, it would have large ongoing capital
needs.
Investments and Alliances
The PCCW Group had significant investments and alliances with international partners
through its subsidiaries. These companies included Pacific Convergence Corporation and
CyberWork Ventures.
Pacific Convergence Corporation
Pacific Convergence Corporation (“PCC”) was a joint-venture holding company 60%-owned
by PCCW and 40%-owned by Intel Pacific Inc. PCC was developing a branded service called
Network of the World (NOW), which would provide broadband Internet connectivity,
specific broadband content and service offerings to consumers and enterprises in various
languages, combined with a supporting infrastructure that allowed electronic transactions and
commerce. The launch of the NOW service was initially expected to take place at the end of
June 2000. Consumers and enterprises could access the NOW service through Internet access
devices such as personal computers, televisions and wireless devices with digital Internet
access functions. The platform would first be available to 130 million cable television-
enabled households in Asia and would be rolled out to the rest of the world soon after. To set
up the NOW programmes (that looked like regular TV programmes but allowed interactivity,
like Websites), PCC had been luring talented content creators from California.
The strategy of NOW was unconventional. Some doubters said that PCCW and Intel were
digging a black hole for their investments, as many ordinary Asians could not even afford to
buy a computer. However, Richard Li was determined to send customers what he called an
“unimaginable array of applications and quality information” through unconventional
television sets that functioned as network computers.5 He envisioned that his customers could
access information on agricultural techniques, small-business finance, university courses,
weather forecasting and family planning, etc. and download MP3 songs by using NOW.
“We had to make a bet in Asia. We made it with PCC.”
- Avram Miller, Business Development Chief and top long-term strategist and
planner of Intel Pacific Inc ⎯ Joint-venture Partner of PCCW.6
5
McGill, D.C., “Empire of the Son”, Wired Digital, May 1999.
6
McGill, D.C., (1999).
300/72C Pacific Century CyberWorks Limited: The Bid for Cable & Wireless HKT Limited
Intel Pacific Inc. was not the only ally of PCCW. Richard Li had brought in the United States
Internet giant CMGI Inc. to bring the AltaVista.com portal and other sites to Asia. PCCW
also formed a partnership with TWI to provide content production facilities for the initial
rollout of NOW. Other strategic partners in the NOW business included SoftNet Systems Inc.
and Legend.
CyberWorks Ventures
Through Cyberwork Ventures, PCCW held strategic positions in Internet companies that
could effectively leverage the company’s broadband platform and provide infrastructure
services, content, commerce, connectivity and community. In early 2000, Cyberwork
Ventures had already acquired more than 40 Internet-related strategic companies ranging
from the Chinese-language portals Sina.com, Sohu.com and Tom.com to US broadband
service providers. PCCW’s contribution to these companies took the form of cash,
advertising inventory or equity in PCCW.
“What we are doing is building a complete jigsaw. If we assemble as many
opportunities as possible, we have the most robust business case going
forward.”
- Alexander Anthony Arena, Managing Director of PCCW7
By assembling its strategic interests in these young companies, PCCW aimed at getting
benefits from their co-operation and the synergies with its core businesses. To PCCW, they
could serve as a valuable source of content, software, hardware and service solutions.
The Cyberport and Other Infrastructure-related Businesses
Besides putting millions into startups, PCCW was also building bricks-and-mortar projects,
ranging from the Cyberport to commercial and residential real estates in Hong Kong and
Mainland China. The Cyberport was expected to provide a working and living environment
that would allow the concentration of high-tech talent and resources. It would have a variety
of features, including an underlying infrastructure optimised for technology requirements and
access to PCCW’s broadband Internet platforms. Many leaders of the Internet had already
expressed their interest in becoming tenants of the Cyberport. They included Microsoft
(Hong Kong) Limited, Hewlett Packard Hong Kong Ltd, IBM China/Hong Kong Limited,
Cisco Systems (HK) Ltd, Oracle Corporation and CMGI. PCCW was also engaged in a
customer premises equipment business in which it acted as a systems integrator for office
telecommunications systems.
In short, the multi-billion-dollar projects and businesses that Richard Li embarked upon were
designed to build channels through which PCCW could pipe digital services and charge a bit
for every byte. However, the channels that he intended to use, such as broadband and
interactive TV, had yet to be a success in Asia. Until the cable operators and telecoms
providers upgraded their systems, the service would be cumbersome for the target customers.
That was why Richard Li had warmed to Fang’s idea of bidding for HKT. The advanced
broadband network of HKT, the largest telecommunication company in Hong Kong, could
serve as a chunk of roadway through which Richard Li could pipe multimedia content and
take a toll.
7
Clifford, M., Einhorn B., Balfour, F., Ewing, J. and Shari, M., “The Dealmakers”, BusinessWeek, 28 February, 2000.
400/72C Pacific Century CyberWorks Limited: The Bid for Cable & Wireless HKT Limited
HKT and the Parent
HKT was 54.39%-owned by Cable & Wireless plc (“C&W”), 10.71%-owned by China
Telecom (Hong Kong) Group Ltd and 8%-owned by the Hong Kong SAR Government.
C&W was the second-largest telecommunications group in the UK, and had operations in
some 70 countries. The group had been on a buying and selling spree as it refocused on
business data services such as Internet access, data transport and Web hosting under its Chief
Executive Graham Wallace. In 1999, C&W sold its 50% stake in the mobile group One2One
to its competitor Deutsche Telekom. It had also agreed to sell its UK domestic cable
television business to NTL Group Ltd. In early 2000, C&W announced a raft of Internet
acquisitions in Europe. In these series of rapid-fire deals, C&W sold a string of non-core
assets in order to make its global Internet and data business more coherent.
Some analysts commented that C&W’s exposure to HKT was “a poison pill” for the group.8
Though C&W used to earn more than 70% of its profits from HKT, contribution from this
subsidiary had fallen to less than 60% in recent years. This was partly attributable to C&W’s
growth in other activities, but also poor performance from HKT that was hard hit by the Asian
economic downturn, the liberalisation of the telecommunications market and increased
competition. HKT was forced to face keen competition as the Office of the
Telecommunications Authority in Hong Kong (OFTA) granted 17 additional licences for
telecommunications services. Exhibit 4 shows the stock price performance of HKT from
1998 to 2000 and the market valuation as at the end of January 2000. Exhibits 5 and 6
present the company’s financial statements for the years 1995 to 1999. Although C&W tried
hard to tell a growth story as it moved to the high-growth business data sector, its results were
overshadowed by HKT, the contribution of which came from a declining market. By getting
rid of this millstone around its neck, C&W believed that it could unlock value, free up
resources, and refocus its investments into a very exciting high-growth area that required
tremendous investment.
Since November 1999, C&W had been in talks with SingTel about a possible merger between
HKT and SingTel. Analysts initially expected that C&W would sell the HKT stake, with
interested parties said to have included Deutsche Telekom, Japan’s NTT and Hutchison
Whampoa. However, C&W had apparently regarded a merger as delivering better value.
SingTel
SingTel was the largest provider of domestic, international and mobile telecommunications as
well as postal services in Singapore. It was also one of the leading telecommunications
operators in Asia, and had established operations in 19 cities in 14 countries, including China,
India, Malaysia, Indonesia, the Philippines, Thailand, Vietnam, Australia, the United States
and the UK. SingNet, a wholly owned subsidiary of SingTel, was the leading Internet service
provider in Singapore. It had over 90Mbps bandwidth via submarine optical fibre to the
Internet backbone in the United States. SingNet and Freei.Net Asia Pacific had formed an
alliance to launch free ISP services in Asia. Freei.Net was the fifth-largest Internet service
provider in the United States.
Like HKT, SingTel faced the problem of being an incumbent in a rapidly deregulating
market. While HKT lost its monopoly in 1998, SingTel was about to face the same situation
as the Singapore Government was planning to remove all restrictions on owning or operating
telecommunications services from 1 April, 2000. At the beginning of 2000, SingTel had
8
Leach., A., “C&W In Talks on 35bn pound Merger”, The Scotsman, 25 January, 2000.
500/72C Pacific Century CyberWorks Limited: The Bid for Cable & Wireless HKT Limited
already lost the battle to remain a major player in the global telecom industry. It went from
being the world’s sixth-largest telecoms company in 1995 to the 21st-largest in early 2000.
The company badly needed to join in a new venture to attract investor interest in its shares.
Before the announcement of the possible merger on 24 January, 2000, shares of SingTel were
trading at S$2.85, which was slightly above their 1993 issue price of about S$2.7.9
A Desperate Embrace by Two Dinosaurs
The market saw the proposed merger of equals between HKT and SingTel as “a desperate
embrace by two dinosaurs”, since both of them were facing erosion of profitability as their
domestic market shares were eaten away by new competitors.10 They also started bumping
into each other as they tried to expand overseas. As of early January 2000, HKT enjoyed only
a slightly higher market capitalisation than SingTel. By themselves, SingTel and HKT
probably lacked the financial muscle to move to deregulated markets, including Southeast
Asia, Taiwan and South Korea, where multinational telecoms companies had not made
substantial investments. With a merged company, however, they could dominate the Asian
region before the American and European giants made their plays. With 5.5 million
customers, four million mobile subscribers and annual revenues of about HK$54 billion, the
merged company was expected to benefit from considerable synergies. These included the
pooling of resources from HKT’s investment in China and South Korea, and SingTel’s stakes
in the Philippines mobile operator Globe Telecom and Thailand’s mobile carrier Advanced
InfoServices.
The merger deal was a surprise to most in the telecoms industry given the political
ramifications of the deal. If the deal went through, the Singapore Government would own the
largest share of Hong Kong’s dominant telecoms group, since it had a 76% stake in SingTel
through its investment arm Temasek Holdings. China, which had a minority stake in HKT
through the state-owed China Telecom, was apparently displeased with the idea that
Singapore might end up in control of the telecoms giant in Hong Kong. Analysts were
therefore worried that incurring the displease of China might affect the future of the merged
company. Some political leaders in Hong Kong also worried that the Singapore government
might sabotage Hong Kong in the perennial battle between the two cities to be Asia’s
commercial and financial hub.
C&W made an announcement regarding the possible merger on 24 January, 2000. The
impact of the announcement on the share price of HKT was not clear-cut [see Exhibit 4].
With a merger, C&W would have about 27% of the combined group. But analysts expected
that the company would reduce its stake to between 15% and 25%, and would raise cash
through a share sale.
Launching a Rival Bid
While negotiations between SingTel and C&W dragged along, there was apparently room for
a rival suitor to join in. Fang Fenglei therefore encouraged Richard Li, who was seen in
China as a patriotic white knight, due mainly to the reflected glory of his father, to join the
fray with his company PCCW.
There were many considerations that would drive Richard Li’s decision about whether or not
to bid for HKT.
9
1S$ ≈ HK$4.45
10
Clifford, M., Einhorn B., Balfour, F., Ewing, J. and Shari, M. (2000).
600/72C Pacific Century CyberWorks Limited: The Bid for Cable & Wireless HKT Limited
Financial Position of HKT
The financial appeal of HKT was evident. In 1999, HKT’s cash on hand amounted to
HK$16.8 billion. Additionally, forecasts showed that HKT would report stable growth in
profits from 2001 onwards. By acquiring HKT, PCCW could finance its investment and
compete more effectively in the fast-developing telecoms and Internet businesses that
required tremendous capital injections.
Potential Synergies
Network Infrastructure
HKT had a comprehensive optical fibre network with over 440,000 km of fibre contained in
approximately 6,120 km of cable, which was one of the highest such installed densities in the
world. The company had also invested in the ATM broadband network that was configured
for the delivery of high-speed multimedia services and e-commerce applications. The
broadband network reached 80% of Hong Kong households, and was one of the largest IP
backbones in Asia outside Japan. HKT’s global telecommunications facilities consisted of
cable, radio and satellite systems. It had access to and proprietary interests in digital
submarine cables throughout the Asia-Pacific region. If PCCW were to merge with HKT, it
could make use of HKT’s advanced network infrastructure to accelerate the delivery of the
NOW service, and capture first-mover advantages in Asia.
International telecommunication services
HKT had previously captured growing demand from corporate customers, ISPs and other
value-added service providers to set up regional network and operating centres in Hong Kong.
It had focused on providing one-stop facilities-management services, offering end-to-end
network solutions, Internet connectivity, data centres and e-commerce applications and
services. Synergies could be obtained from a merger through consolidating HKT’s corporate
telecoms services with the office telecoms services of PCCW.
Internet and IMS
HKT provided dial-up, broadband DSL and total Internet solutions for households and
businesses. Its Netvigator ISP service was Hong Kong’s ISP market leader and its
www.netvigator.com portal provided Internet users in Hong Kong, Taiwan and Canada with
access to content in Chinese and English. The company also provided the world’s first
broadband interactive television service (iTV) in March 1998. HKT had a total of 411,000
customers from Netvigator and some 90,000 broadband and iTV customers. A merger with
HKT would therefore allow PCCW to bring together HKT’s customer base and its technical
and management expertise for the development of multimedia content, services and facilities.
A merger would also accelerate PCCW’s roll-out of its digital services in other markets.
In late 1999, HKT announced that it would form a joint venture with News Corp’s Satellite
Television Asia (Star TV). The joint venture would provide digital television, Internet and e-
commerce services in Hong Kong and Asian countries. It would initially be 60%-owned by
HKT and 40%-owned by Star TV. The services provided by the joint venture would include
50 TV channels, video-on-demand, conventional and high-speed broadband Internet access
services, on-line shopping, e-commerce applications and other information services. PCCW
considered that the services offered by the joint venture would pose a threat to its NOW
service. With a merger, PCCW would eliminate a strong competitor in Asia.
700/72C Pacific Century CyberWorks Limited: The Bid for Cable & Wireless HKT Limited
Other synergies
In short, the competitive position of a combined group between HKT and PCCW would be
enhanced through leveraging HKT’s established customer relationships and strategic network
with the world-leading partners, building scale and efficiency in the network and operational
services, and the pooling of Internet expertise and assets.
Potential spin-offs
Although a merger with HKT could provide considerable benefits to PCCW, there were
certain parts of HKT’s businesses that might not fit into PCCW’s high-growth strategy.
These included the digital GSM and D-AMPS mobile systems owned by HKT that served all
market segments in Hong Kong through its three mobile brands, 1010, One2Free and 1+1.
HKT had previously focused on developing a network that could support 3G high-speed
wireless data technologies. The company also operated more than 3.7 million fixed lines, i.e.
more than one line for every two people in Hong Kong. To PCCW, HKT’s net, satellite and
television assets offered more synergies than the mobile and old fixed-line assets. If PCCW
were to merge with HKT, it would have to decide whether to keep the low-growth mobile and
fixed-line businesses, which could, however, serve as an immediate source of revenue.
To Bid or Not to Bid
As of late January, 2000, SingTel and C&W had not solved the deadlock over the merger
deal. There were rumours that SingTel would pay about HK$23.4 billion in cash and offer
shares in the merged company in return for C&W’s 54.39% stake in HKT. No formal
announcement had been made by either party about the details of their negotiations.
However, it was quite clear that C&W would prefer cash rather than stocks in order to finance
its global Internet and data development business.
If PCCW won the bid, it would be proof that highly valued Internet stock was coming of age
as an acquisition currency. The latest evidence to date was the strategic merger of equals
between the world’s largest on-line service business, America Online, Inc., and the media
giant Time Warner Inc. This deal was announced on 10 January, 2000 [see Exhibit 7]. The
deal showed how an Internet player, backed by high stock prices on the promise of fabulous
profits, took over an old economy stock. Perhaps it was worth considering the premium paid
by America Online, Inc. in exchange for the solid assets from Time Warner.
The challenge for PCCW, therefore, was to decide whether or not to bid for HKT, how much
value a merger would bring, and how much they would have to pay in order to win the bid.
PCCW also had to consider the risks involved in the merger deal. As an advisor to Richard
Li, you were asked to conduct an analysis of the current financial and operating environment
of both PCCW and HKT, and also to recommend a suitable bid price.
Exhibits 8A and 8B show the financial data of selected telecommunications and Internet
firms as at 31 January, 2000. Exhibit 9 presents the capital market information in Hong
Kong.
800/72C Pacific Century CyberWorks Limited: The Bid for Cable & Wireless HKT Limited
EXHIBIT 1A
DAILY PERFORMANCE OF THE SHARE PRICE OF PCCW (FORMERLY KNOWN
AS TRICOM HOLDINGS LTD) RELATIVE TO THE AOI
(30 JAN, 1998 TO 31 JAN, 2000)
25 Event (b)
20
PCCW
15 Event (a)
HK$
10
AOI*
5
0
30-Mar-98
30-Sep-98
30-Nov-98
30-Mar-99
30-Sep-99
30-Nov-99
30-Jan-98
30-Jul-98
30-Jan-99
30-Jul-99
30-Jan-00
30-May-98
30-May-99
* AOI (All Ordinaries Index) is a market value-weighted index that includes all the ordinary shares
listed on the Stock Exchange of Hong Kong. It has been indexed to equal PCCW’s share price at the
starting date of the time series.
Event (a): 4 May, 1999 – Tricom Holdings shares rose more than 1,200% in a frenzy of
speculation after Pacific Century Group said it was making a HK$2.46 billion bid for the
company.
Event (b): 28 Dec, 1999 – PCCW announced that it was teaming up with Japan based Hikari
Tsushin, a wireless-services company and Internet investor, in a takeover of Hong Kong-
listed Golden Power International Holdings. The alliance was expected to help PCCW roll
out its Internet services.
EXHIBIT 1B
MARKET VALUATION OF PCCW AS AT 31 JANUARY, 2000
Share price HK$18.35
Beta 0.469
Price-to-book value 14.66
P/E 183.7
Shares in issue 10,825.52 million
Sources: Datastream and Annual Reports
900/72C Pacific Century CyberWorks Limited: The Bid for Cable & Wireless HKT Limited
EXHIBIT 2
PACIFIC CENTURY CYBERWORKS LIMITED
CONSOLIDATED BALANCE SHEETS – AS AT 31 DEC, 1997 TO 1999
(All figures in HK$ million) 1997 1998 199911
Current assets
Cash and bank balances 21.82 10.32 5,053.89
Accounts receivables, prepayments & other current assets 110.42 87.1 298.44
Other investments 0.03 - 273.89
Amounts due from related companies - 0.12 5.25
Inventories 90.54 67.95 20.28
Properties held for sale/under development for sale - - 894.63
222.82 165.49 6,546.37
Non-current assets
Fixed assets 184.26 166.88 1,198.08
Properties held for/ under development - - 1,590.27
Intangible assets 20.05 - 17.3
Term loan receivable - - 0.39
Investments 15.3 16.46 4,554.32
219.61 183.34 7,360.35
Total assets 442.43 348.83 13,906.72
Current liabilities
Short-term borrowings 103.90 39.60 975.97
Accounts payables and accruals 125.51 114.30 302.69
Amounts due to shareholders of subsid. & related companies - 5.89 26.07
Loan from a shareholder - 52.2 -
Advances from customers - - 170.73
Taxation - 0.72 4.04
229.40 212.71 1,479.49
Deferred liabilities
Long-term liabilities 32.43 - 158.9*
Amount due to shareholders of subsidiaries - - 28.7
Convertible bonds - - 882
Long-term loan from a shareholder - 18 -
Other liabilities 1.42 1.08 1.54
33.85 19.08 1,071.15
Total liabilities 263.26 231.79 2,550.64
Share capital 23.06 23.09 453.35
Reserves 151.79 90.57 10,897.79
Minority interests 4.33 3.38 4.94
179.18 117.04 11,356.08
* Unsecured and interest-free
Source: Annual Reports
11
Richard Li purchased the company as a backdoor listing vehicle through Pacific Century Group (“PCG”) in mid-1999.
1000/72C Pacific Century CyberWorks Limited: The Bid for Cable & Wireless HKT Limited
EXHIBIT 3
PACIFIC CENTURY CYBERWORKS LIMITED
CONSOLIDATED INCOME STATEMENTS –
YEARS ENDED 31 DEC, 1995 TO 1999
(All figures in HK$ million) 1995 1996 1997 1998 1999
Turnover
Continuing operations 169.292 190.518 206.251 114.704 131.354
Discontinued operations 241.505 134.314 146.328 170.376 20.679
410.797 324.832 352.579 285.08 152.033
Operating profit (loss) before 22.887 21.595 (6.244) (62.282) 336.757#
exceptional items
Exceptional items - -2.493 - - 21.294
Share of results of associates -0.055 -2.561 2.119 0.825 (5.478)
Profit before tax 22.832 16.541 (4.125) (61.457) 352.573
Taxation 2.321 3.811 1.394 2.403 7.25
Profit after tax 20.511 12.73 (5.519) (63.86) 345.323
Minority interests -0.108 0.083 0.498 1.822 1.482
Profit (Loss) for the year 20.403 12.813 (5.021) (62.038) 346.805
EPS (basic) 4.60 cents 2.85 cents (1.09 cents) (13.44 cents) 9.99 cents
Dividend per share (note) 1.5 cents - - -
# Including gains on other investments.
Note: Dividends paid in 1995 included interim dividend of 0.50 cents each and 444,000,000
PCCW Shares in issue, final dividend of 1.50 cents each and 445,290,000 PCCW shares in
issue.
ANALYSIS OF TURNOVER
(All figures in HK$ million) 1995 1996 1997 1998 1999
Continuing operations
Sale of customer premises & 168.133 190.044 190.504 106.618 112.475
equipment and provision of
related maintenance service
Rental income - - - 1.067 18.248
Commission income & others 1.159 474 15.747 7.019 631
169.292 190.518 206.251 114.704 131.354
Discontinued operations
Sale of infrastructure 241.505 134.314 146.328 170.376 20.679
communication systems
410.797 324.832 352.579 285.080 152.033
Source: Annual Reports
1100/72C Pacific Century CyberWorks Limited: The Bid for Cable & Wireless HKT Limited
EXHIBIT 4
DAILY PERFORMANCE OF THE SHARE PRICE OF HKT RELATIVE TO THE AOI
(30 JAN, 1998 TO 31 JAN, 2000)
30
25
AOI*
20
HK$
15
10
5
0 30-Sep-98
30-Mar-98
30-Sep-99
30-Mar-99
30-Jan-98
30-Nov-98
30-Jan-99
30-Nov-99
30-Jan-00
30-May-98
30-Jul-98
30-May-99
30-Jul-99
DAILY STOCK PRICE RETURN OF HKT (FOR THE MONTH ENDED 31 JAN,
2000)
24 Jan, 00: HKT announced that its venture
13 Jan, 00: There with Star TV would launch Internet TV
were rumours that 10% programmes within three to six months
Jardine Fleming 8%
Group and HKT
could buy up to 6%
10% of an Internet-
based research firm 4%
2%
Daily return
0%
HKT
11-Jan
13-Jan
15-Jan
17-Jan
19-Jan
21-Jan
23-Jan
25-Jan
27-Jan
29-Jan
31-Jan
3-Jan
5-Jan
7-Jan
9-Jan
-2%
-4%
-6%
-8% 24 Jan, 00: C&W made an evening
announcement regarding a possible
-10%
merger between HKT and SingTel
-12%
* AOI (All Ordinaries Index) is a market value-weighted index that includes all the ordinary
shares listed on the Stock Exchange of Hong Kong. It has been indexed to equal HKT’s share
price at the starting date of the time series.
1200/72C Pacific Century CyberWorks Limited: The Bid for Cable & Wireless HKT Limited
MARKET VALUATION OF HKT AS AT 31 JANUARY, 2000
Share price HK$18.9
Beta 0.783
Price-to-book value 5.95
P/E 19.6
Shares in issue 12,160.48 million
Sources: Datastream and Annual Reports
1300/72C Pacific Century CyberWorks Limited: The Bid for Cable & Wireless HKT Limited
EXHBIT 5
CABLE & WIRELESS HKT LIMITED
CONSOLIDATED BALANCE SHEETS – AS AT 31 MARCH, 1995 TO 1999
(All figures in HK$ million) 1995 1996 1997 1998 1999
Current assets
Cash, deposits & bank balances 4,788 7,998 14,486 14,719 16,816
Short-term interest-bearing notes 80 7 - - 424
Inventories and work in progress 386 419 508 579 763
Debtors 2,537 3,368 4,527 4,769 3,796
Others 33 48 168 3,613 475
7,824 11,840 19,689 23,680 22,274
Non-current assets
Fixed assets 19,974 22,256 25,405 28,404 29,470
Investments 342 401 518 721 729
Other assets 1,766 2,058 2,053 1,373 1,501
22,082 24,715 27,976 30,498 31,700
Total assets 29,906 36,555 47,665 54,178 53,974
Current liabilities
Bank and other loans 2,495 3,767 5,225 2,790 2,088
Deferred revenue 673 623 674 774 792
Accrued charges and customer 918 920 1,445 2,022 1,286
deposits
Creditors 3,290 3,894 3,874 4,701 4,718
Taxation 448 290 494 550 516
Dividend payable 3,613 4,173 4,876 5,550 5,573
11,437 13,667 16,588 16,387 14,973
Deferred liabilities
Bank and other loans 40 - - - -
Deferred taxation 710 709 716 739 858
Minority interests 1 32 73 105 127
751 741 789 844 985
Total liabilities 12,188 14,408 17,377 17,231 15,958
Share Capital 5,576 5654 5,847 5,955 5,980
Reserves 12,142 16493 24,441 30,992 32,036
17,718 22,147 30,288 36,947 38,016
Source: Annual Reports
1400/72C Pacific Century CyberWorks Limited: The Bid for Cable & Wireless HKT Limited
EXHIBIT 6A
CABLE & WIRELESS HKT LIMITED
CONSOLIDATED INCOME STATEMENTS – YEARS ENDED 31 MARCH, 1995 TO
30 SEPTEMBER, 1999
(All figures in HK$ million) 1995 1996 1997 1998 1999 1999#
(interim)
Turnover 26,910 29,405 32,578 35,041 32,411 14,184
Operating costs
Depreciation 1,710 1,940 2,191 2,443 2,964 1,598
Allocations to other telecoms 7,667 7,810 8,644 8,394 6,403
operators
Salaries and related costs 3,661 4,013 3,916 4,025 4,113
Cost of sales and services 889 1,331 2,125 3,024 3,272
Rent, rates and utilities 566 518 602 846 1,054
Royalty to Hong Kong Govt. 544 502 525 443 -
Management fees to C&W plc 217 211 209 221 112
Other operating costs 1,894 1,988 2,163 2,394 2,655 7,615
Operating profit before
exceptional items 9,762 11,092 12,203 13,251 11,838 4,971
Exceptional items - - - 4,558 - (7,088)
Net interest & other income 276 386 706 1,064 1,304 -
Profit before tax 10,038 11,478 12,909 18,873 13,142 (2,117)
Tax 1,339 1,515 1,690 1,808 1,599 635
Profit after tax 8,699 9,963 11,219 17,065 11,543 (2,752)
Minority interests - 24 41 37 36 15
Profit (loss) for the year 8,699 9,939 11,178 17,028 11,507 (2,767)
EPS in HK$ (basic) 0.78 0.888 0.972 1.438 0.964 ($0.23)
Dividends per share in HK$ 0.324 0.369 0.417 0.466 0.466 0.386
Capital expenditure 4,045 4,331 5,026 5,775 4,903 NA
Sources: Annual Reports
1500/72C Pacific Century CyberWorks Limited: The Bid for Cable & Wireless HKT Limited
EXHIBIT 6B
ANALYSIS OF TURNOVER FOR CABLE & WIRELESS HKT LIMITED
YEARS ENDED 31 MARCH, 1995 TO 1999
(All figures in HK$ million) 1995 1996 1997 1998 1999 1999#
(interim)
International telecoms 16,311 16,528 17,395 18,910 15,564 5,958
Local telecoms service 3,669 4,068 4,570 8,886 9,401 4,810
Other telecoms service 4,443 5,941 7,839 - - -
Equipment sales 1,625 1,807 1,860 - - -
Computer, engineering, 863 1,062 914 - - -
etc.
Mobile services - - - 5,996 5,824 2,416
Internet & interactive - - - 255 626 486
Technical & other - - - 994 996 514
26,910 29,405 32,578 35,041 32,411 14,184
# For the six months ended 30 September, 1999.
FORECASTS
2000 2001 2002
Net Profits (HK$million) 1,021 7,595 8,190
EPS (HK$) 0.085 0.627 0.676
DPS (HK$) 0.636 0.501 0.541
Source: Annual Reports and Forecasts by Core Pacific-Yamaichi Research
1600/72C Pacific Century CyberWorks Limited: The Bid for Cable & Wireless HKT Limited
EXHIBIT 7
THE MERGER BETWEEN AMERICA ONLINE, INC. AND TIME WARNER INC.
America Online, Inc. Time Warner
Stock price
One month before the US$91.5 US$65.13
announcement of the merger,
i.e. 10 Dec, 1999
On the date of the US$71.88 US$90.06
announcement of the merger,
i.e. 10 Jan, 2000
Terms America Online shareholders Time Warner shareholders
would receive one share of would receive 1.5 shares of
AOL Time Warner for each AOL Time Warner for each
share of AOL stock they share of America Online
owned Stock they owned
Total Value of the Deal US$350 billion
Note: 1US$ ≈ 7.74 Hong Kong Dollar
Source: Press Release, America Online, Inc., 10 January, 2000.
1700/72C Pacific Century CyberWorks Limited: The Bid for Cable & Wireless HKT Limited
EXHIBIT 8A
FINANCIAL DATA OF SELECTED TELECOMMUNICATIONS FIRMS
AS AT 31 JANUARY, 2000
Company Turnover Market Capitalisation Beta Price-to-book P/E
In 1999 (million) (million) value
Telecoms firms in Hong Kong
CCT Telecom HK$1,572 HK$6,309.34 1.127 2.08 44.3
New World HK$51 HK$4,951.82 1.001 3.66 NA
Cyber
Smartone Tele HK$3,074 HK$16,952.71 0.861 2.87 23.3
China Mobile* NA HK$659,272.2 1.167 NA 80.1
City Telecom HK$1,046 HK$2,668.02 1.109 8.2 80.1
Telecoms firms in Asia (outside Hong Kong)
SingTel S$4,884 S$43,635.67 0.828 4.86 16.2
(HK$21,734) (HK$194,179)
Korea Telecom NA Won39,337,184 NA 2.89 140.5
(HK$269,066)
Indosat Rp2,738,813 Rp14,186,341 0.961 2.98 9.8
(HK$2,348) (HK$12,167)
*Formerly known as China Telecom.
Notes: 1S$ ≈ HK$4.45
1HK$ ≈ Rp1,166
1000 won ≈ HK$6.84
EXHIBIT 8B
FINANCIAL DATA OF SELECTED INTERNET FIRMS
AS AT 31 JANUARY, 2000
Company Turnover Market Beta Price-to-book P/E
In 1999 (million) Capitalisation value
(million)
AOL US$4,777 US$127,422.6 2.139 21.43 121.3
(HK$36,974) (HK$986,251)
CMGI US$176 US$27,683.83 1.944 5.77 74.3
(HK$1,362) (HK$214,273)
Note: 1US$ ≈ HK$7.74
Sources: Datastream and Annual Reports
1800/72C Pacific Century CyberWorks Limited: The Bid for Cable & Wireless HKT Limited
EXHIBIT 9
CAPITAL MARKET INFORMATION IN HONG KONG
Year Month Exchange Fund Bills/ Bonds Yield (%)
1 week 1 month 2 years 10 years
1998 Jan 31 5.7 6.91 11.06 10.35
Feb 4.46 5.24 7.55 8.13
Mar 4.76 5.21 7.85 8.14
Apr 5.66 5.71 7.8 8.42
May 6.6 7.19 8.74 9.2
Jun 8.04 8.74 10.55 10.45
Jul 7.24 7.56 9.53 9.9
Aug 15.55 14.03 10.64 9.9
Sep 5.8 6.64 8.51 8.55
Oct 6.34 6.06 7.16 7.46
Nov 4.86 4.94 6.65 6.96
Dec 5.21 4.87 5.96 6.36
1999 Jan 31 5.26 5.55 7.06 7.13
Feb 5.72 5.47 6.91 7.3
Mar 5.14 5.19 6.61 7.16
Apr 4.33 4.48 5.95 6.82
May 4.7 4.77 6.46 7.33
Jun 5.54 5.35 6.45 7.71
Jul 5.39 5.56 6.29 7.48
Aug 5.75 5.83 6.43 7.44
Sep 4.79 5.15 6.31 7.38
Oct 5.76 5.41 6.44 7.53
Nov 4.78 4.81 6.3 7.64
Dec 2.4 3.38 6.37 7.74
2000 Jan 5.26 5.32 6.49 7.62
Average yield 5.81 5.97 7.44 8.00
(Jan 98 to Jan 00)
Average yield 5.60 5.74 6.85 7.79
(Jan 95 to Jan 00)
Period Average Return on
AOI * (%)
January 1998 to January 2000 19.33
January 1995 to January 2000 15.09
January 1990 to January 2000 18.14
* AOI (All Ordinaries Index) is a market value-weighted index that includes all the ordinary
shares listed on the Stock Exchange of Hong Kong.
Inflation rates
Year-on-year 1992 1993 1994 1995 1996 1997 1998 1999 Average
Rates of change (92 – 99)
(%)
Composite CPI 9.6 8.8 8.8 9.1 6.3 5.8 2.8 -4.0 5.9
Prime Rate as at Jan 2000 = 8.5% Profits tax rate = 16%
Sources: Datastream, CEIC DRI Asia Database, and http://www.info.gov.hk/hkbi/enghkbi/5/5-
7a.htm
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