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