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Cablegate: Pccw Sale: Li Family Ties Revealed

VZCZCXRO2029
PP RUEHCN RUEHGH RUEHVC
DE RUEHHK #4495/01 3211058
ZNR UUUUU ZZH
P 171058Z NOV 06
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC PRIORITY 9519
INFO RUEHOO/CHINA POSTS COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 HONG KONG 004495

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EB/CM AND EB/CIP/BA
STATE FOR EAP/CM
USDOC FOR ITA/EAP LEVINE, ITA/FCS/OIO/EAP ZARIT
TREASURY FOR OASIS
STATE PLEASE PASS TO USTR MCHALE

E.O. 12958: N/A
TAGS: ECON EFIN ECPS PGOV PREL CH HK
SUBJECT: PCCW SALE: LI FAMILY TIES REVEALED

REF: A. A) HONG KONG 2607
B. B) HONG KONG 2851
C. C) HONG KONG 3987

1. (U) SUMMARY. In early November, the Singapore Exchange
announced that Richard Li would not be permitted to vote on
the sale of Singapore-listed Pacific Century Regional
Development's (PCRD) 23% share of PCCW to Francis Leung.
Richard Li is the Chairman and 75% stakeholder of PCRD, Li is
also the son of Hong Kong's richest businessman, Li Ka-shing.
In announcing that Li would not be permitted to vote at the
late November special meeting of PCRD shareholders, the
Singapore Exchange stated that "PCRD was unable to assure the
exchange on whether Mr. Li or related parties, including his
father, Li Ka-shing, were involved in the sale." Since the
Singapore Exchange's announcement it has emerged that Leung's
backers in the purchase of PCRD's PCCW shares are Li Ka-shing
and Telefonica, the Spanish telecom giant. With Li barred
from voting it is possible that minority investors in PCRD
could vote to block the sale.

2. (SBU) Another aspect that clouds this deal is the
influence mainland China exerted. If the deal goes through,
China Netcom, the mainland telecom giant, will end up as the
largest single shareholder with 20% of the company. Analysts
speculate that Telefonica, which has a joint-venture with
China Netcom in the Mainland, might swap PCCW shares for a
stake in China Netcom. This scenario would result in the
Chinese telecom giant gaining even more leverage over PCCW.
Analysts speculate the PCCW-China Netcom-Telefonica deal
could lead to a consolidation of the mainland and Hong Kong
telecom markets. In Hong Kong, legislators, the Broadcasting
Authority (BA), and the Office of the Telecommunications
Authority (OFTA) are examining the deal,s impact on
telecommunications competitiveness. The Hong Kong
Broadcasting Authority is also looking at whether the deal
could create a media monopoly as PCCW owns NOW Broadband,
Hong Kong,s major cable television provider, and Li
Ka-shing,s Hutchinson Whampoa is the sole owner of the
territory,s Metro Radio. END SUMMARY.

3. (U) In July 2006, Singapore-listed Pacific Century
Regional Developments (PCRD) - 75% of which is owned by
Richard Li ) announced that it would sell its 23% stake in
PCCW, the Hong Kong telecom and media giant, to Francis
Leung, an associate of Richard Li's father, Li Ka-shing.
This announcement put an end to two earlier bids by foreign
firms for PCCW's telecom assets. China Netcom, the PRC
telecom giant and a major stakeholder in PCCW, opposed the
sale to foreign bidders. After the Leung deal was announced,
the Singapore Exchange (SGX) questioned Li and Leung over the
sale because SGX regulations stipulate that if the money came
from any direct member of Richard Li's family, Richard Li
would lose his rights to vote on the deal. After weeks of
denying any Li family involvement, Li Ka-shing,s spokesman
acknowledged that Leung received a bridge loan from Li
Ka-shing to help with the initial purchase offer. As a
result, SGX barred Richard Li from voting on the deal,
leaving the sale,s fate in the hands of minority
shareholders of PCRD, many of whom reportedly preferred the
two foreign bids for PCCW,s assets. On November 11,
independent investors in PCRD recommended that PCRD,s
shareholders reject the proposed sale because the price
offered by Leung did not reflect the growth prospects of
PCCW. PCRD shareholders will vote on the sale on November 30.

4. (U) If it goes through, the proposed deal will change the
ownership structure of PCCW. China Netcom, currently the
second largest shareholder, will become the majority holder
with a 20% stake. Li Ka-shing,s Hong Kong and Canadian
charities will gain a combined 12% stake of the company;
Telefonica will have 8%. 2.65% will go to Leung, while
Richard Li will retain 3.8%. The remaining shares will
continue to be traded publicly. The new shareholding
structure must be approved by December 20.

5. (SBU) China Netcom denied speculation that it would try to
change the structure of PCCW,s Board of Directors. However,
close ties between Telefonica and China Netcom cause analysts
to doubt the Chinese company,s statements and to anticipate
that it will attempt to gain control of the board. Telfonica
acquired 5% of China Netcom last year. Together, the two
companies will own 28% of PCCW. A Telefonica spokesman said
that it plans to swap its PCCW shares for shares in China

HONG KONG 00004495 002 OF 002


Netcom, which would dramatically increase China Netcom,s
stake in the Hong Kong company. A telecom analyst said that
this arrangement between Telefonica and China Netcom could
facilitate an eventual consolidation of PCCW and China
Netcom. He noted that a full merger of the two companies
would enable PCCW to grow in the Mainland telecom, internet
and media markets. It also would be a symbolic step in the
continued integration of Hong Kong into the mainland economy.

6. (U) Hong Kong regulators have expressed concern over the
deal,s impact on competitiveness in the broadcasting and
telecommunications sectors. Through Hutchinson Whampoa, Li
Ka-shing owns, Metro Radio and Hutchinson
Telecommunications. Since PCCW is the main provider of
broadband television services in Hong Kong, the deal could
violate the broadcasting,s ordinance,s cross-media
restrictions that forbid one person from owning competing
media outlets. These restrictions are geared to safeguard
press freedoms in Hong Kong by guaranteeing a diversity of
editorial content in the media. The Hong Kong Broadcasting
Authority will examine whether the involvement of Li Ka-shing
or any of the entities that he controls violates these
cross-media restrictions.

7. (U) Albert Cheng, Chair of Legco Information Technology
and Broadcasting (ITB) panel, also expressed concern over
market domination in the telecom sector by Li Ka-shing,
noting that Hutchinson Telecom already enjoys a large market
share and that the potential purchase of PCCW stock will turn
him into the dominant telecom figure in Hong Kong with a
potential negative impact on the public. The ITB panel will
hold hearings the week of November 20 on the sale,s impact
on telecom market domination, potential monopolies, and
cross-media ownership.

8. (SBU) Regulators and legislators have expressed concern
over the way in which Li Ka-shing is trying to get around
competition laws by having his charitable foundations, not
his companies, make the purchase. Hong Kong regulators have
stated they will investigate the funding sources, but to
block the sale, they must prove that Li Ka-shing is the
ultimate beneficiary of his foundations. Analysts predict
that this will be a difficult task even though Li recently
donated HK$4.04 billion dollars (US$ 518 million) donation to
his foundations for the purchase of PCCW. Legislator Emily
Lau opined that such business tactics and closed door deals
hurt small and independent Hong Kong investors, who have
difficulty safeguarding their investments against large
shareholders like Li, Leung and China Netcom. She believes
that the deal tarnishes Hong Kong,s international reputation
as a transparent financial center and a rule of law society.
She and others urge the government to examine the case
closely.
Cunningham

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