C&W gets `unique foothold' in China

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The Independent Online
Chris Godsmark

Business Correspondent

Cable & Wireless yesterday pulled off its long-awaited deal with the Chinese government, selling part of the UK group's lucrative stake in Hong Kong's main telephone network and gaining what it hailed as a unique foothold in China, one of the world's fastest growing communications markets.

After months of talks Dick Brown, C&W chief executive, secured a significant coup by concluding the agreement with the Chinese Ministry of Posts and Telecommunications, before Britain hands over control of Hong Kong. In the first phase C&W will sell 5.5 per cent of the its 59 per cent stake in Hong Kong Telecom to China Telecom, the main state operator. In later stages C&W has conceded that it could reduce its shareholding below 50 per cent towards parity with the Chinese.

The deal would raise HK$9,177m (pounds 726m) for C&W, valuing Hong Kong shares at HK $14.25, well below yesterday's closing price of $18.98. The group defended the low selling price, arguing it was the average trading value in recent months. C&W would use the cash to pay off debt before examining further acquisitions.

The announcement sent C&W's share price soaring by 74.5p to a record high of 572p, adding almost pounds 1.7bn to the group's market value. The previous peak of 546p for C&W shares was last year during the abandoned merger talks with British Telecom.

In return C&W said it had achieved the first significant foothold by an outside telecommunications group into China, a market with huge growth potential where just 7 per cent of customers have phone connections. "China Telecom is growing at the rate of one British Telecom every fifteen months," said Rodney Olsen, the finance director.

Speaking from Peking, Mr Brown said one possibility was that future deals with China Telecom could be done through share swaps. "Certainly this is not the end of announcements. Others will follow but we don't want to be held to a date.... It could lead to a situation where we go below 50 per cent, where we go below a shareholding equal to China." He added that any further share sales would be "mutually agreed" with the Chinese.

It was less clear yesterday what China Telecom had offered to C&W in return. The "unique opportunity" was the right to become the major investor in China Telecom's subsidiary in Hong Kong, set up to develop a foothold in the colony. Mr Olson said the subsidiary was vehicle to invest in China itself, getting round a ban on direct stakes by foreign companies.

"This establishes the platform for news to come later. It won't come in the weeks ahead, but certainly in the months ahead. There is much to be done and that's in the interests of both of us," Mr Brown said.

Analysts were guarded about the deal last night, pointing to the difficulty of valuing opportunities in China. Mark Lambert, a telecommunications analyst with NatWest Markets, said: "In principle, access to China is fantastic, but we don't know the details of this deal. We don't know what price they are paying, or the size of stake they will get.''

The announcement caps almost a year of high profile deals by Mr Brown since he joined C&W in July 1996. His two previous coups were to extricate C&W from an alliance in Germany with the utility group Veba, and the deal to attack the UK phone and cable TV market by merging Mercury with three cable companies to form C&W Communications.