A pedestrian walks past a row of PCCW Ltd phone booths in Central. PCCW successfully appealed a decision made in April to block its plan for the city's first listed business trust. Daniel J. Groshong / Bloomberg

News boosts shares by as much as 6.7% after Richard Li wins his appeal

The Hong Kong Stock Exchange stepped up its competition with Singapore by approving an estimated $650 million spinoff of PCCW Ltd's telecommunications units into the city's first listed business trust.

PCCW, chaired by media tycoon Richard Li, was given the approval late on Thursday. The news boosted PCCW shares as much as 6.7 percent to a five-week high on Friday, bucking a 1.3 percent fall in the benchmark Hong Kong index.

The approval came after PCCW appealed a decision made in April by the exchange's listing committee to block its plan for the city's first listed business trust.

Hong Kong Exchanges and Clearing does not yet have the regulatory framework in place to allow business trust listings and is working to have the rules in place within the next few months. That will establish a level playing field with Singapore Exchange Ltd, which already allows such listings.

PCCW is working with Hong Kong regulators to finalize a structure that would enable the business trust to operate within Hong Kong's existing regulatory framework.

In March, tycoon Li Ka-shing, Richard Li's father, listed the ports business of Hutchison Whampoa as a business trust in Singapore, rather than in his home city of Hong Kong.

Business trusts are popular with companies because they allow them to raise cash without relinquishing control. In a business trust model, the trust sells units to investors, but control of the business is left with the trustee manager, who is usually an affiliate of the company establishing the trust.

"The (PCCW) news is having a short-term (upside) impact on the stock price, but for the spinoff itself, it doesn't really excite the market very much when there are many IPOs around," said Patrick Yiu, a director at CASH Asset Management.

"On the business front, their businesses are set to be the same with rather stable growth prospects for a telecom industry in a mature market like Hong Kong," Yiu added.

PCCW plans to distribute between 5 and 10 percent of the stapled securities of the business trust through a bonus issue to PCCW shareholders. Some analysts estimate the PCCW spinoff will raise about HK$4-5 billion ($514 million-$643 million).

"The business trust will have increased financial resources and a clearer focus on the mature and stable cash-flow generating telecommunications business," PCCW said in filing to the stock exchange late on Thursday.

PCCW stock rose as much as 6.7 percent to HK$3.17, its highest since April 27. But later in the afternoon, the stock gave up some of its gains to close at HK$3.10.

"The stock jumped in response to the news, but it might overshoot and we would advise investors to wait for further clues such as how likely it could obtain minority shareholders' support," said Linus Yip, chief strategist at First Shanghai Securities.

Since the spinoff will be via a trust, the company's dividend yield is seen as the main attraction for investors. PCCW said the company intends to maintain at least the same level of dividend distribution to shareholders as in 2010 for the three years following the proposed spinoff.

After the spinoff, PCCW will retain control of the telecommunications business, its controlling stake in property business unit PCPD and a 100 percent interest in each of its IT outsourcing business and the media business, it said.

PCCW intends to hold 55 percent of the trust, selling the remaining 45 percent through the listing process.

"The structure being discussed with the regulators involves the listing of stapled securities, with each stapled security comprising a unit in a trust and a share in the holding company of the telecommunications business," PCCW said.

Operations of the unit will comprise local telephony services, local data services, international telecommunications services and mobile services, it said.

The proceeds will be used to cut debt and to generate funds to expand PCCW's businesses, the company said.

Up to 30 percent of the offering will be made available to shareholders on a preferential basis, it said, adding that the spinoff is subject to shareholder approval.

Reuters

(HK Edition 06/04/2011 page2)