Business Outlook: C&W's retreat from Hong Kong

able & Wireless has been suffering from a nasty bout of Asian flu lately, courtesy of its exposure to the region via a 54 per cent shareholding in Hongkong Telecom. Yesterday it received a pick-me-up in the shape of a compensation deal Hongkong Telecom has hatched with the colony's new Chinese landlords in return for surrendering its monopoly over international calls.

The deal sparked a rally in the share prices of both companies, which is understandable enough since C&W relies upon Hongkong Telecom for two- thirds of its operating profits. But is this a case of the patient leaving the sick bay prematurely only to suffer a worse relapse later?

First the bull case. The terms of the compensation deal are at least as good and probably better than the market had been expecting. In addition to a cash payment of pounds 530m, Hongkong Telecom ceases to make royalty payments of pounds 42m a year for the privilege of owning the monopoly. Moreover, it is allowed to begin ratcheting up charges for line rentals having had to provide them up until now at below cost with a subsidy from international call revenues. Finally, C&W preserves its majority shareholding in Hongkong Telecom with the clear understanding that it will not cede control unless it gets something concrete back from Peking, in the shape of real access to the Chinese mainland.

Now the bear case. Hongkong is already a relatively mature and saturated market. Moreover, competition in the domestic market already means that no-one pays for a local call; now the same market forces are about to bear down on Hongkong Telecom's international business. But the biggest question marks concern when, how and indeed whether C&W will ever get a meaningful deal with the Chinese. Peking remains paranoid about granting access to China's telephone system, regarding it less as a commercial opportunity and more as a threat to national security.

Hongkong Telecom waxes lyrical about exploring new investment opportunities in the colony, mainland China and Asia Pacific. But to rest of the world, it looks to be relaxing its grip on the region and forcing its majority shareholder to beat a retreat at the same time.