PCCW, Hong Kong's dominant phone company, yesterday confirmed that China Network Communications Group Corporation (China Netcom Group) will buy a 20 percent stake in it for US$1 billion in cash.

"It will be the largest investment ever made by a mainland State-owned enterprise in a Hong Kong telecoms company," said Jack So, deputy chairman and group managing director of PCCW.

PCCW, controlled by Richard Li the son of Asia's richest businessman, Li Ka-shing, will see his stake shrink to about 25.5 percent from 31 percent after the acquisition. But he will still be chairman and the largest shareholder of the company.

"This transaction will lay the foundations for PCCW to participate in the fast growing telecommunications market in China’s mainland. At the same time, the capital injection will further strengthen our financial fundamentals," said Richard Li in a statement.

China Netcom Group, the parent of Hong Kong and New York-listed China Netcom, is expected to buy 1.34 billion new shares in PCCW for HK$5.9 apiece (75 US cents), a 25.5 percent premium on PCCW's closing price.

Shares in PCCW were suspended ahead of the market opening in Hong Kong yesterday. The price closed at HK$4.7 (60 US cents) on Wednesday, after a 5 percent reduction in the share price in the last three months, and a 15 percent decline in their cost over the past year.

Alexander Arena, chief financial officer of PCCW, said the proceeds from the acquisition will partly go to reducing the company's debt to US$2.8 billion from US$3.8 billion, and the transaction is expected to be completed in late March subject to shareholders' approval.

In addition, PCCW agreed to earmark over 60 percent of the proceeds, or HK$5 billion (US$641.03 million) for China-related investments and set up a PRC Business Development Committee.

Jack So said both his company and China Netcom Group are studying certain long-term joint projects on a larger scale, although nothing has been finalized.

However, he noted that the two sides would take into account the other's advantages, such as PCCW's edge in fixed-line networks, broadband TV services and property development.

So added that PCCW has received a good market response for its broadband TV service which has attracted more than 400,000 subscribers and is currently operating more than 40 channels.

Norman Zhang, telecoms analyst of Tai Fook securities research, said this was good news for both sides, adding that China Netcom might focus more on PCCW's broadband services in the future.

Zhang said the development of broadband services on the mainland remains in its infancy compared with rest of the world, therefore "the broadband business might be a new growth area for China Netcom on the mainland."

Meanwhile, another telecoms analyst from Core Pacific Yamaichi Securities noted that from the perspective of profit, China's telecoms industry holds many more opportunities than Hong Kong.

(China Daily January 21, 2005)