Hk Telecom Seen Crucial To Global Consortia

Hongkong Telecommunications was just the bait Cable & Wireless Plc needed to hook a global alliance, but uncertainty over the Hong Kong unit's prospects would shape any deal, analysts said yesterday.

London's Sunday Times newspaper reported Cable & Wireless was in talks with AT&T Corp and Sprint Corp of the United States on forming 20 billion alliance. Cable & Wireless chairman Dick Brown was quoted as saying his company was an "enormously attractive" potential partner.

A large part of Cable & Wireless's attraction lay in its 59.6 per cent stake in Hongkong Telecom, analysts said. "The extent to which a partner adds value to a consortium is defined by the size of the customer base it controls, and Hongkong Telecom has access to virtually 100 per cent of the subscriber base in Hong Kong, which is the largest generator of traffic in Asia," said Fredson Bowers of WI Carr.

 

In terms of access to customers and international traffic, Hongkong Telecom was far bigger than its parent, he said. The telecom industry is seeing a coagulation into three alliances -- AT&T's World Partners; Deutsche Telekom, France Telecom and Sprint's GlobalOne; and British Telecommunications and MCI's Concert.

The consortia aim to provide multinational corporations with global services that allow offices in Hong Kong, London or New York to communicate with each other as if using internal lines.

But Asia tends to be the weakest leg of all three consortia, and Cable & Wireless, through its stake in Hongkong Telecom, would be a major asset to any of them, analysts said. "Cable & Wireless is too small to be a true global player," said David Gibbons of HSBC James Capel. "On the other hand it does have some very attractive strategic assets in the UK and Asia which would complement very nicely the US and Eurocentric operations of some these other major global alliances." Hongkong Telecom already is as a member of World Partners and has a marketing deal with Concert , but analysts said the current relationships were loose marketing arrangements that were insufficient to ensure the company's strategic future. "Hongkong Telecom would like to be competitive as an Asian hub for major corporate customers, and to maintain that competitiveness, they will likely need to be a part of a strong global consortium," said an analyst at a European brokerage.

But Hongkong Telecom is not without problems. The company's future profits are clouded by a U.S. drive to cut international direct dial rates. It is in talks with the Hong Kong government on a possible early termination of its international franchise.

Most of all, no one knows how the British-owned company will fare after Hong Kong reverts to China in mid-year.

Capel's Gibbons said the need to clarify its post-handover position could push Hongkong Telecom into quickly finding a strong Chinese partner many investors say it needs.

"I think, given the need to cement Hongkong Telecom's ties to the mainland, maybe prior to (a global alliance), it might accelerate the whole process of formalising some kind of equity relationship with China," he said.

But Carr's Bowers said any deal Cable & Wireless strikes was unlikely to involve heavy equity investments such as the British Telecom/MCI merger, in which case Hongkong Telecom's exact valuation or China relations would be less of a concern.

Analysts also said there was no assurance Cable & Wireless would snag a deal any time soon as international telecom firms were always talking with each other. And Hongkong Telecom may not be the center of attention anyway. "Hongkong Telecom might be the jewel in the crown but it is not the only asset that might appeal," said Gibbons.