New World Development, one of Hong Kong's largest real estate developers, plans to sue Davnet after the Australian telecommunications company called off talks to buy a 74% stake in New World's fixed line telephone business, claiming it was losing revenue, market share and staff.

Melbourne-based Davnet said yesterday that New World was not as valuable as it thought. It said the company was losing out to competitors and suffering from staff defections and low morale. New World vigorously denies the claims.

"We categorically deny the allegations made in the statements that there has been any rapid depletion of quality employees and staff morale in New World Telephone," the company said in a statement. "We further deny that there has been any decline in the market share of NWT in the fixed line business, or any significant loss of staff at NWT."

Heat rises as value falls

The spat caps five months of negotiations during which the market value of both companies has plummeted. Davnet's shares have fallen 79% from a 52-week high of A$5.99 in March, while New World Development has fallen 73% from a 52-week high of HK$27.05 in July 1999. Davnet refused to return repeated phone calls seeking comment on New World's action.

New World says it is in talks with several companies about selling its fixed line phone business. It also plans to sell at least 20% of New World Telephone PCS, its mobile-phone business. While the fixed line business is unprofitable, the cellular operation broke even in the first quarter of this year. New World is the fourth largest of Hong Kong's six mobile operators, with 600,000 subscribers, or a 12% market share. It's the smallest of the four fixed line operators, with a market share of between 1% and 2%.

"The fixed line business in Hong Kong is very tough and I think they will find it hard to find a buyer," says Edison Lee, telecommunications analyst at Credit Lyonnais Securities Asia (CLSA). "The only guys who would be interested would be existing players who would want to consolidate the market and eliminate competition."

Analysts say Hong Kong probably cannot support more than three fixed line operators and that the top three û Cable & Wireless HKT, Hutchison Telecommunications and Wharf (Holdings) Ltd. û will likely squeeze New World out unless it can complete construction of a fiber backbone that could be leased to other carriers and internet service providers. Davnet had planned to do that but says now it would take more capital than it had expected.

Davnet, which installs infrastructure for data networking, video conferencing, internet and voice communications in high-rise buildings, is blaming New World for the failure of the talks, but analysts say Davnet may have been using its planned acquisition of the New World stake to generate publicity for its own hoped-for listing in Hong Kong.

"There's been a lot of financial engineering going on there," says CLSA's Lee. "In terms of capital raising it's much more difficult for Davnet now and that could be another reason why they didn't go ahead."

Davnet, which has aspirations to expand across Asia, plans to provide services to 500 buildings in Hong Kong through an agreement that gives it access to a fiber-optic network owned by Hutchison Whampoa, the city's biggest conglomerate.