Hong Kong Court’s PCCW Ruling Leaves Questions on Future Deals
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HONG KONG — While shareholder activists cheered the failure of a $2.1 billion management buyout of PCCW Ltd., the court decision that doomed the transaction may produce uncertainty about Hong Kong regulations and future deals.
Shares of the Hong Kong telecommunications company dropped 13% Thursday to finish at 3.58 Hong Kong dollars (46 U.S. cents) as analysts questioned the growth prospects of the company in a mature market. But PCCW Chairman Richard Li said PCCW would issue a special dividend of HK$1.30 a share — a payout that could leave shareholders with as much, or more, than the offer, even as it removes cash from the balance sheet.
Mr. Li’s buyout group scotched the deal Thursday, one day after a three-judge appeals court sided with local regulators who opposed it. Overall, the decision cheered shareholder activists, who have accused regulators of falling behind other jurisdictions that have tightened oversight amid the financial crisis.
“Hong Kong needed some good news with respect to corporate governance,” said Jamie Allen, secretary general of the Asian Corporate Governance Association, which is based here. “On a moral basis, it’s a good decision, and a lot of people will welcome it.”
But the ruling also created uncertainty because the court hasn’t yet released its opinion. Some deal watchers noted that the judges quizzed attorneys for PCCW and the buyout group on the fairness of an offer made during a market slump, raising questions about whether Hong Kong courts could look askance at other deals.
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Heard: Lifting Haze in Hong Kong Governance
4/24/09Court Clears Li’s Takeover Of PCCW
4/6/09Asia Alerts: Click here to sign up | SettingsDuring this week’s court proceedings, Justice Anthony Rogers described the Li-led bid as “pathetic” for shareholders who paid more than HK$100 a share, the company’s share price at the height of the dot-com boom nine years ago.
“We were surprised to see the judge commenting on the commercial aspects of the deal,” Mr. Allen said.
Martin Rogers, a lawyer at Clifford Chance LLC in Hong Kong who represented the buyout group, added, “It’s unfortunate for the judge to say something like that.”
The two also said the practice of distributing shares to new holders — a practice known as “share splitting” — would probably dwindle as a result of the decision. Mr. Allen and others hope that the PCCW case will provide the impetus for regulators to scrap what’s known as the headcount rule, which they say encourages share splitting.
That rule was at the center of the court dispute. Under one requirement for the type of deal the buyout group offered, a buyer must have the backing of 50% of shareholders, regardless of the number of shares they hold. In the weeks before a February shareholder vote at which the deal was approved, a manager at a company once controlled by Mr. Li’s investment vehicle gave thousands of PCCW shares to new holders.
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A group of PCCW small investors celebrate outside The High Court in Hong Kong Wednesday.
The local Securities and Futures Commission and shareholder activists argued the move was an improper effort to meet the 50% requirement. PCCW and Mr. Li’s group defended the handouts, saying the manager provided them as rewards and didn’t tell the recipients how to vote.
The company is paying the dividend out of its available cash, which at the end of 2008 totaled around HK$9 billion. The payout will total about HK$8.8 billion based on shares outstanding.
Mr. Li, who owns 6% of PCCW directly and another 23% through another vehicle, will benefit from the dividend payout. HSBC Holdings PLC had been financing the buyout, but its funds were conditional on the privatization going forward and will be canceled.
Analysts said that paying the dividend increases PCCW’s total debt and indicates the company isn’t viewed as a likely growth candidate because management chose to pay cash to shareholders rather than invest in it or pursue acquisitions. Citigroup, which said in a March research report, “We wish PCCW all the best in a new private life if that is to be,” downgraded the shares to “sell” in a report dated Wednesday, setting a target price of HK$3 each. It said the court decision Wednesday “takes out a significant and only positive catalyst for the stock.”
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