PCCW chasing blue sky is a costly new dawn

In the space of a week, PCCW Ltd., Richard Li’s company, has cheered investors by getting out of the U.K., then brought them back to earth with plans to bulk up video streaming in Asia.
Days after Li sold the loss-making British broadband provider to his father Li Ka-shing, PCCW is disposing of a $1.1 billion stake in telecom unit HKT Trust & HKT Ltd. Proceeds will be used to trim debt and bolster media operations. With leverage at its highest since 2001, there’s little doubt PCCW does need to ratchet down borrowings.
But as Monday’s hit to both companies’ shares shows, investors are concerned that PCCW’s new-media push could be an expensive failure. They’re right to be worried.
Succeeding outside one’s home market is never easy, as PCCW itself found after more than a decade of trying in the U.K. The area PCCW is now championing — a video service that streams content on various devices — is an expensive and competitive business that involves contending with deep-pocketed rivals like Amazon.com Inc. and Netflix Inc.
PCCW has already begun expanding its so-called OTT digital video service beyond Hong Kong to Singapore, Malaysia, Indonesia, India and the Philippines, none of which are particularly easy markets to crack. PCCW’s OTT business revenue jumped 35 percent to HK$583 million ($75 million) last year but the costs of content acquisition dented the unit’s bottom line, with earnings before interest, tax, depreciation and amortization sinking further into negative territory.
PCCW’s core telecom-to-broadband business in Hong Kong is facing headwinds, too. But while HKT’s sales for the year ended December slipped 3 percent, it’s still the city’s top telecommunications firm, with its 2013 acquisition of Telstra Corp.’s Hong Kong cell-phone unit cementing its lead over Hutchison Telecommunications Hong Kong Holdings Ltd.
That’s the kind of edge PCCW could easily maintain with the right kind of handset plans or improved data deals. Li should also realize that it pays to be committed to HKT, and not just because the telecoms unit is a core business. As a trust, HKT throws off a lot of a cash. Monday’s sale of 840.7 million shares for HK$10.15 apiece will reduce PCCW’s stake to 52 percent, from 63 percent. According to Morgan Stanley, that means HKT’s annual dividend contribution could fall by 17 percent to HK$2.4 billion.
In all, PCCW may be better off sharpening its focus at home and working on improving its mobile-phone offering. Chasing consumers anywhere, let alone in Asia, can be a fickle business — start-up investments in marketing, content and new-market launches resulted in an Ebitda loss for PCCW’s OTT business of HK$235 million for the full year versus HK$58 million for 2015. Sometimes, the numbers speak for themselves. —Bloomberg
Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter