Chinese fixed-line telephone operator, China Network Communications Group Corp (CNC), has finally emerged as the largest single shareholder of Hong Kong phone company PCCW Ltd. This could end a row over the controversial sale of PCCW's assets.

CNC has signed a deal with Spanish telecoms operator Telefonica, under which the European firm will buy 8 percent of the issued share of capital of PCCW. And CNC and Telefonica will transfer all their interests in PCCW to a special purpose vehicle (SPV), which could become the single largest shareholder of the Hong Kong company with a 27.94 percent stake, CNC said in a statement.  

CNC currently controls a 19.94 percent stake in PCCW through its unit China Netcom Group Corp (Hong Kong) Ltd.

The CNC-Telefonica alliance could clear the way for Netcom to control the assets of the ailing PCCW, in which Richard Li Tzar-kai, son of Hong Kong billionaire Li Ka-shing, has a 23 percent stake.

Richard Li was seeking to sell his stake to overseas investors in a move strongly opposed by the state-owned CNC. But Hong Kong financier Francis Leung stepped in and agreed in July to pay US$1.17 billion for the 23 percent controlling stake held by him.  

Leung's move has sparked speculation that Li Ka-shing intervened to end the row between his son and CNC. Leung has a close relationship with Li Ka-shing who is dubbed as Asia's richest man.

Two charity foundations controlled by Li Ka-shing will also buy a 12 percent stake in PCCW, leaving CNC-Telefonica SPV as the single largest shareholder.

CNC said in the announcement it "is not acting in concert with any person, except Telefonica, in regard to its shareholding in PCCW." The firm said it hadn't entered into any agreement or arrangement with Leung or the foundations controlled by Li Ka-shing.

"I think it's a win-win deal for all the parties involved," said Wang Guoping, an analyst with China Galaxy Securities, "and is a deal that can be accepted by all parties."

The CNC-Telefonica alliance could avoid a showdown between CNC and PCCW. CNC has expressed in public that it hoped PCCW's assets would be controlled by Hong Kong businesses.

Under a deal, Telefonica may have the right to swap its PCCW shares with CNC for shares in listed China Netcom. Telefonica already holds a 5 percent stake in China Netcom. The swap could increase Telefonica's share in China Netcom to 9.9 percent and increase CNC's share in PCCW to 27.94 percent. 

That could provide Telefonica, the No.2 phone company in Europe, a short-cut to enter China's lucrative telecoms market.

Under China's commitments to the World Trade Organization, foreign investors will be allowed to form joint ventures to provide so-called "basic" telecoms services, mainly voice services, with up to a 49 percent stake, beginning at the end of this year.

However, forming a company offering basic services involves immense investment and high risks. "So far the best way for overseas operators seeking an entry into China is to buy a stake in listed Chinese carriers," Wang said.

Vodafone, the world's largest mobile operator by sales, has bought a stake in China Mobile, the world's largest cellular operator by subscribers.

South Korea's top mobile operator SK Telecom (SKT) in June signed a deal with China Unicom, under which SKT will buy a stake in China Unicom Ltd. Unicom will issue US$1 billion in convertible bonds to SKT. These bonds can be converted by SKT to a 6.6 percent stake in Unicom in a year.

The Ministry of Information Industry, the country's telecoms watchdog, said in September that it had received 29 applications from foreign investors to provide telecoms services in China. None of them were seeking to provide the basic services. They all hoped to provide the telecoms value-added services, which require much less investment.

(China Daily November 14, 2006)