China Deal Could Be Jewel In C & W Crown

In sealing a deal with the Chinese government last week, Cable and Wireless, the UK's second-largest telecommunications group, has prised open the door to the tough but potentially huge mainland market.

The agreement could change the balance of power in the $600bn (368bn)-a-year telecoms services industry, reinforcing C&W's appeal to suitors through what Richard Brown, its chief executive, described as its ''long-term partnership'' with China.

It marks the latest and potentially most significant move by mainland-backed companies to take stakes in Hong Kong industries before the territory's return to Chinese sovereignty. They had already invested in the power and aviation sectors.

 

Industry analysts cautioned that in telecoms, as in other industries, there is a large gap between potential and profits in the mainland market, and that foreign investment in telecoms services remains barred.

But they said the deal, concluded on Friday evening between Brown and Wu Jichuan, the Chinese minister of post and telecommunications, gave C&W an edge.

''There are only six in 100 households with telephone lines, so it is a market where even a toe-hold is attractive,'' said one telecoms analyst. ''C&W has emerged as the preferred international partner.''

C&W's foothold in the Asia-Pacific region through its majority shareholding in Hongkong Telecom, Hong Kong's only full-service telecoms operator, already makes it an attractive partner for other carriers. British Telecommunications made an unsuccessful takeover bid last year, for example.

This looks like a coup for Brown. In exchange for a 5.5 per cent stake in Hongkong Telecom, for which the Chinese will pay $1.2bn, the UK group will have the opportunity ''to penetrate the high growth telecommunications market in China''.

The deal is not exclusive. Brown said no telecoms operator could expect exclusive entry to the Chinese market, ''but it is as close to exclusive as you can get''. It is a first phase which could see C&W reduce its stake in HKT to about 30 per cent in exchange for expansion opportunities on the mainland.

For now, however, C&W retains a majority stake in HKT - which provides more than 60 per cent of its profits - and removes the uncertainty surrounding its main asset. The parent will only sell down, insists Brown, if shareholder value is enhanced.

For Brown, appointed C&W chief executive a year ago, the problem had been how to reconcile his desire to retain a majority stake in HKT with Chinese reluctance to allow foreign majority ownership of a strategic company on its territory.

A series of visits to Beijing seems to have paid off. The company insisted there was no political pressure to reach a deal. ''This bodes extremely well for a smooth transition for Hong Kong,'' said Rod Olsen, C&W deputy chief executive.

The key to the accord was China Telecom, the operating arm of the Ministry of Post and Telecommunications and the dominant operator on the mainland with more than 60m subscribers.

It will hold the initial 5.5 per cent stake, tightening China's grip on Hongkong Telecom as China Everbright, a Beijing-backed conglomerate, already has a 7.7 per cent stake.

In exchange, C&W will have the opportunity to invest in China Telecom (Hong Kong), a subsidiary established to develop activities in Hong Kong and China.

The business is expected to be listed within the next six months. While the opportunities are vast, so are the uncertainties. Much will depend on how the first phase of the partnership with the Chinese works.

Brown is adamant that there is no compulsion or commitment to lower C&W's stake in HKT below 50 per cent. As to projects in China, ''we have specific ideas about the future''. At least as important is how and when China Telecom (Hong Kong) will be able to invest in China. As a Hong Kong company, it faces regulatory obstacles in participating in mainland projects. Solutions, according to Gautam Kapoor at ING Barings, include building networks in exchange for a share of revenue streams.

Others suggest mobile networks as an area for expansion, while one telecoms analyst said regulations could be amended to treat Hong Kong companies as domestic investors.

Whether or not the partnership bears fruit, analysts say this is a watershed for C&W. Either it is the partnership which gives it the lead in potentially the world's largest telecoms market or the deal which sees the jewel in its crown slipping away. HK telecom issue 'in demand'

Plans to list China Telecom (Hong Kong) are likely to meet with strong demand from Hong Kong and international investors, according to investment bankers in the territory, writes John Ridding in Hong Kong.

The issue, to be managed by Goldman Sachs, according to bankers in Hong Kong, would be the latest in a series of ''red chip'' offerings. These listings of mainland-backed companies have seen record subscription levels over recent months, fuelled by the prospect of asset injections from Chinese parent companies. ''China Telecom (Hong Kong) would offer the only direct telecoms investment in China,'' said Lloyd Fischer, head of regional telecoms research at BZW in Hong Kong. BZW is advising C&W. Other analysts cautioned that delicate regulatory issues would have to be resolved before assets could be injected into the Hong Kong vehicle. Foreigners are not allowed to own equity in or to operate telecoms services in China. China Telecom (Hong Kong) is the Hong Kong subsidiary of China Telecom, the operating arm of China's Ministry of Post and Telecommunications. Cable & Wireless, the UK company, is set to be the major telecommunications investor. There is pressure to move ahead quickly with a listing given market

sentiment. Copyright Financial Times Limited 1997. All Rights Reserved.