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Hong Kong court readies ruling on PCCW buyout

Date: 3/30/2009 3:05:44 PM

A judge is set to decide this week whether to approve Hong Kong tycoon Richard Lis US$2.1 billion effort to take telecom operator PCCW Ltd. private, a closely watched moment for the citys securities regulators, business community and the minority shareholders who have criticized the deal.

How the court rules on the deal will be critical to the fortunes of Mr. Li, the 41-year-old son of billionaire Li Ka-shing and an ambitious entrepreneur who had grand visions for PCCW when he took control of the company at the height of the dot-com bubble. Local regulators are probing an unusual number of PCCW share registrations in the days before a special shareholder vote last month that approved the deal. In a filing earlier this month, Mr. Lis buyout consortium said it had no knowledge of or involvement in any improper activities, and said it expected the court proceedings to continue as scheduled.

On Wednesday, High Court Justice Susan Kwan will consider whether to approve the deal under Hong Kong law, a decision that is expected to be made by Thursday. Should the plan fail this time, Mr. Li and his consortium are likely to be barred by local listing rules from making another attempt for one year, legal experts say. Mr. Li declined to comment.

PCCWs shares finished Monday at 3.93 Hong Kong dollars (about 51 U.S. cents) a share, a nearly 13% discount to the HK$4.50 a share offer price, indicating lingering skepticism that a deal will get done.

The Hong Kong blue-chip stock slid more than 90% from its highs in 2000, and Mr. Li since has tried three times to sell all or part of PCCWs assets. He announced a buyout plan late last year that includes him, one of his investment vehicles and China United Network Communications Group Co., which currently owns about 20% of PCCW. He has not yet made clear his intentions for PCCW should he win control of the company, which generates significant cash but faces limited growth prospects in its saturated home market.

Under the deal, Mr. Lis group would buy out the 52% of PCCW shares it doesnt already own. The amount is a 55% premium to the share price before the group expressed initial interest in October but is below the stocks rough trading range of HK$5 in recent years.

Just days before last months shareholder vote, local media reports and a prominent shareholder activist claimed they saw signs of vote rigging. Hong Kongs Securities and Futures Commission, the local securities regulator, confiscated voting slips and argued successfully in court to put the deal on hold while it investigates the claims. A spokesman for the agency, known as the SFC, declined to comment.

Whether the deal succeeds will also be a key test for the agency. The SFC, like its regulatory counterparts overseas, has come under heavy public scrutiny for its handling of a string of local high-profile cases that has focused public attention on Hong Kongs corporate governance standards.

On Friday, the regulator scored its third criminal conviction for insider dealing in the last 12 months. Prior to that, Hong Kong regulators had never before convicted anyone on insider dealing. It also launched a formal probe this month into irregularities in the trading of shares in HSBC Holdings PLC, which dropped sharply in the last seconds of trading earlier this month. HSBC called the steep fall a technical trading aberration.

Justice Kwan of the High Court has the power to halt the PCCW deal if the SFC brings forward any evidence to scuttle the vote, though analysts say its possible the SFC requests more time to continue its investigation. Another group paying close attention to the courts decision is small shareholders, many of whom bought into the stock during its headier days and strongly oppose Mr. Lis buyout plan. If the courts reject Mr. Lis privatization deal, the share price is expected to dip.

Cody Leung, an investment strategist at Quam Securities Co. in Hong Kong, said PCCWs stock price, which slipped below HK$4 a share since the SFC launched its investigation, already factors in the high uncertainty of the deal. Mr. Leung is advising his clients to buy the shares, figuring that the offers 15% premium outweighs the risk of the deal failing, which he reckons would send PCCW shares down by about 10%

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