gut aus.Meldung bei www.quamnet.com PCCW, suspended yesterday pending its after market announcement, announced details of a new capital raising exercise that will ultimately involve increasing share capital by around 33%.
The company is proposing a rights offer, with warrants thrown in as sweetener, and the issuance of convertible bonds in a wholly-owned subsidiary. The company is telling the public that the exercise is to pay down debt to below US$4 billion and thus enable them to be "in a better position to secure a triple-B rating with the banks," according to PCCW deputy chair-individual Francis Yuen. The SCMP quoted Yuen as also saying "we also want to clear up uncertainties about our finances." However, an analyst quoted in the same article probably pointed out the more driving reason: odds are, the banks are making them do it. "The company is clearly under pressure from banks to raise more money to improve its ratios and payback ability."
This didn't stop the ever-faithful Lehman folks from effervescent expositions on how wonderful the stock is. The SCMP reported one of the U.S. brokerage's analysts, Michael Leary, as saying "I am totally supportive of its growth strategy and we feel it is executing it very well." Mr. Leary also said the average rate PCCW pays on its debt, around 8.6%, is "obviously quite high for a company of its quality and with its cash flows." Of course, most of the quality and cash flow comes from HKT rather than its range of interesting Internet investments.
Review: The Telstra Connection
PCCW currently has around US$9 billion in debt remaining after the takeover of HKT. Much of it is short-term though refinancing is allowing portions to be rolled over. Following the revised Telstra deal, PCCW will receive a total of US$3.555 in cash. Of that amount, US$1.68 billion is from Telstra for a majority 60% stake, up from a minority 40% stake for US$1.5 billion in the original deal, US$750 million from a convertible bond issued to Telstra (halved from the original US$1.5 billion), and a new US$1.125 billion from new debt they hope will be issued to their IP backbone JV.
The convertible bond's conversion price was cut to 15% over the average share price for the 45 days following the announcement on October 13. At that time, PCCW shares traded at HK$7.65, but at yesterday's HK$6.50 close, the conversion price keeps getting lower. Last week, PCCW shares dipped below HK$6 per share. For a rough average, for the moment lets assume it's HK$6.80 -- about halfway between HK$6 and HK$7.65. The 15% premium would currently work out to around HK$7.85.
New Telstra Deal: PCCW Gets US$3.555 Billion
The cash from the revised Telstra deal will be used to lower PCCW's debt from slightly over US$9 billion down to US$5.5 billion.
For a quick debt review, PCCW borrowed nearly US$12 billion for the HKT takeover with US$3 billion due within 90 days of the loan. That amount has been paid. The remaining US$9 billion must be repaid, and thus refinanced, before March 2001. With 4 months to go, PCCW is struggling but things are starting to fall in place. According to the SCMP, if they don't refinance by the deadline, the rate they pay on their remaining debt jumps from the current 1.15% above Libor to 3% above Libor. Assuming Libor stays unchanged, the 1.85% increase means PCCW will be paying around 10.5% interest. On the US$9 billion, that would equate to an additional US$170 million a year in payments -- over HK$1.3 billion extra to dish out. Now it is more clear why Telstra was so important to PCCW and why PCCW was willing to sacrifice for it.
The Facts of the New Deal: New Shares, New Money
Under the proposal announced last night, PCCW will raise another US$1.83 billion and use that to bring debt down to under US$4 billion. Assuming the full amount is thus applied and not diverted to operations or creative investments, the debt load will decrease to US$3.67 billion. However, investors will remember that Telstra's CB is also a debt instrument as is 70% of this proposal. Regardless, with short-term debt of US$3.67 left, PCCW will be in a better position for banks to refinance the loan, and the March deadline looks doable. The proposal's structure is as follows:
Bucks to be Raised
To R. Li
PCCW will sell US$600 million worth of 5-year convertible bonds to institutional investors and US$500 million in CBs to Chairman Richard Li. The plan also allows for another US$200 million in CBs to institutional investors under a "green shoe" option. The conversion price is yet to be set but will be 21% to 26% higher than the last HK$6.50 close. Finding a rough mid-way point at a little over 23% premium, the conversion price would work out to a cute and convenient HK$8 per share if that's the way they play it.
The rights issue will raise US$530 million if shareholders play ball. The rights issue is 30 new shares for every 1,000 owned at HK$6.50 per rights share. Subscribers will also be granted two warrants per rights share with an exercise price of HK$7.50. Though the warrants are thrown in to make the whole thing more palatable, a rights issue is still a convenient way for firms to raise funds by forcing investors to either cough up more dough or see their shares lose a little value. It is not the most shareholder-friendly act available though it is preferable at least to private placements.
The CBs, if converted, along with the rights shares and warrants, if fully exercised, will lead to a 33% increase in the present share capital:
Share Capital Expansion
To R. Li
CB Conversion = HK$
Rights Issue = HK$
Warrants = 2 per rights share
The above calculations do not include Telstra's C. Bond. Assuming it is converted at HK$7.85 as described in the previous review of the revised Telstra deal, that will add another 743 million shares to the pot (US$750 million CB x HK$7.78 = HK$5.835 billion ¸ HK$7.85 = 743 million).
Current and Expanded Share Capital
There are currently 21.242 billion PCCW shares outstanding. Counting the rights issue only, the 634.4 million new shares will slightly edge the total share capital up to 21.88 billion. Excluding the warrants and Telstra but including the new CBs, however, the share capital will jump to 27.03 billion for a 27% rise. The warrants, if exercised, will further bump that figure up to 28.3 billion shares for a 33% share capital expansion. Finally, including Telstra, the total potential number of shares outstanding is 29.04 billion shares with share growth coming to 37%.
Though there are a few positive notes about this deal -- Richard Li putting his money where his mouth is by buying US$500 million in CBs for one and underwriting the rights placement for two -- the fund raising shows a bit of desperation. On the one hand is the potential for large share growth and therefore dilution for later shareholders or those who don't take part in the rights issue. On the other is the large amount of debt still on the balance sheet even if the form is convertible bonds. With coupons of 3% or so, interest payments, including the Telstra CB, come out to US$56 million (HK$432 million) for these things alone.
One more positive comes from the warrants. Should they be exercised, that will be an additional US$1.2 billion (HK$9.5 billion) inflow on which would be a tremendous aid in helping the company slash its debt.
Buy, Hold, or Sell
The funding is definitely a tremendous help to PCCW, and whether bankers are forcing PCCW to do this at knife-point or not doesn't change the fact that the company will benefit. However, the benefit is somewhat double-edged, and what is happening is essentially a series of delaying tactics in the hope that buying extra time will allow them to internally generate the cash needed to pay its phone bill. Perhaps PCCW is also hoping for a boost in a few markets which will give them a selling opportunity for a number of its "strategic" investments.
Investors considering a PCCW investment should hold off a while. The company has probably finally realized that it has to perform -- not just for the stock market but for its own business survival -- and this is a good thing. Perhaps there is a chance of missing some upside, but the risks associated with the stock are still high.
Und hier die Marktreaktion:
Evening Analysis: Market Drops on PCCW Weakness
24 Oct ,2000
Accounting for a third of today's trade, it was PCCW (8) that did the damage to the HSI. The index almost closed under the 14,900 level before a last-minute rally narrowed the loss to just 179.43 points, finishing at 14,925.93 on turnover of HK$8.39 billion with the landscape dominated by Hong Kong's favorite Internet play. Banks and properties were largely ignored by the market though they also got side-swiped by the PCCW fire sale.
PCCW dropped 75 cents, 11.5%, to crash right through the vital HK$6 level to a year low of HK$5.75 though the stock managed to hold up somewhat in the morning. The day low was just 5 cents below the close. Turnover was an impressive HK$2.67 billion, putting to shame the next contender, HSBC (5), at just HK$776 million. PCCW was suspended yesterday pending the announcement of new fund raising activities that came hot on the heels of its Telstra deal revision. Via a combo of convertible bonds, a rights issue, and warrants (click here for article), PCCW could raise US$1.83 billion (HK$14.2 billion). The proceeds will go to paying down PCCW's US$9 billion in short-term debt taken on for the purchase of Hongkong Telecom. Combined with money contributed by Telstra and through some additional long-term debt to be raised via the two companies' IP backbone joint venture, the proceeds will help decrease PCCW's short-term debt to under US$4 billion. This should make it easier for PCCW to get banks to refinance the rest of the loan before a March deadline. The current loan facility expires on February 27, 2001.
The market was not impressed with Richard Li's personal commitment of US$500 million for some of the convertible bonds though perhaps the pessimism in today's trade was a little too harsh. Now is not the time to buy this stock, however, as it is better to let things settle before stepping in. The move will help the company temporarily deal with its short-term debt issue, but PCCW is taking on more debt via the convertible bonds and refinancing, so interest charges will continue to dog the company for some time to come.
Es heisst offenbar,dass die Banken Li gezwungen haben,die Kapitalerhöhung durchzuführen.Jetzt rächt sich die Übernahme von Hongkong Telekom und die 9Milliarden Schulden dafür.Wenn er die im März fälligen 9Milliarden nicht bedienen kann,zahlt er 10,5% Zinsen.Jedenfalls wird empfohlen,jetzt nicht einzusteigen.