HSI ¡V 17,188.96 (-191.34)
The euphoria over the potential acquisition of a stake in C&W HKT by Pacific CyberWorks (PCCW) sent the HSI rocketing at the opening, touching a high of 17,939. While C&W HKT (+21.9%) was able to maintain its gains for the day, most blue-chips retreated sharply, led by declines in Hutchison and China Telecom. Other technology stocks also retreated, but heavy buying was seen in a few ¡¥flagship companies' of major Internet stocks, including ACME Landis, Cheung Wah and Golden Power. Trading in the HSI is expected to remain volatile this week and hinges on the proposed acquisition deal on C&W HKT. 16,800 will provide key support for the index.
PCCW (1186) BUY
PCCW raised $5.75bn yesterday from the placing and subscription of 250mn shares at $23.50 each. PCG has also granted options to procure purchasers to acquire a further 85mn shares. A total of $7.7bn would be raised if the options are exercised. The proceeds will be used to finance the acquisition of a stake in C&W HKT. If the merger does not occur, the net proceeds will be used by PCCW to acquire other information technology and Internet related investments, and other related investments in broadband connectivity services.
Should all options be exercised, we estimate that PCCW will have a cash balance of $15.7bn. PCCW may need to raise a further $10.8-125.8bn for the proposed merger (we have revised up our assumption on the offer price for HKT from $20.60 to $23.80). PCCW is likely to spin off some of the operations in HKT and seek partnerships with strategic investors. It was also rumoured that PCCW is looking to raise $70bn in debt financing.
C&W's stake in HKT to be paid by cash
Cash to be paid to C&W (Note 1)
Less: Net placement proceeds for PCCW (Note 2)
Less: Estimated cash balance of HKT
Estimated funds to be raised
1. Assume shares in HKT to be priced at $23.80 each.
2. The net placement proceeds = placement proceeds - investment made by cash
Source: Dao Heng Securities estimates