For Pacific Century CyberWorks (PCCW) the music has stopped and investors’ love-in with the company has come to an end; the share price has dropped two-thirds since it announced its takeover of Cable & Wireless HKT. But it’s not just stockmarket investors who have ditched PCCW and its promised riches – previously announced deals are falling by the wayside as well. Planned joint-ventures with CMGI and GigaMedia are no longer on the cards and there is intense speculation that Telstra may complete the hat-trick – a move that would rob PCCW of a much-needed $3 billion of fresh capital.

For now, PCCW is keeping its numerous PR mouthpieces well away from the phones – not very good for business considering the company is Hong Kong’s number one telecoms provider. Telstra on the other hand maintains the two companies are still in talks and aiming to get a deal done by year-end. “Our intention is to get a deal done; it can only be good for both companies,” says Telstra spokesman Steve Wright.

Under the original terms of the deal, announced in May prior to PCCW’s completion of the C&W HKT takeover, the two were going to merge their Asian mobile phone and IP backbone businesses into separate joint-ventures. Telstra, which isn’t bringing much to the party on the mobile phone side, was going to pay PCCW $1.5 billion and subscribe for a further $1.5 billion convertible note which could be converted into PCCW shares at HK$23.65 ($3.03) apiece. The conversion price for this note has subsequently been revised down to HK$19.52.

Despite this revision, Telstra’s Wright says the pricing of the deal hasn't been the main topic of discussion. “The PCCW share price is not a key factor in the deal. It doesn’t affect the business fundamentals of the joint-venture we will set up and it doesn’t affect Telstra’s financials in any way.” “Price isn’t the only thing being discussed and it’s not occupying most of our time,” he adds.

There can, however, be little doubt which company has the upper hand in the talks. PCCW needs to get a deal done fast so it can get on with some pretty hefty financing – HK$7 billion to pay for the construction of Hong Kong’s cyberport and a minimum $6 billion to refinance part of the $12 billion bridging loan it took out to pay for C&W HKT.

The company is in the process of getting a credit rating and, without a $3 billion infusion of cash from Telstra, it might be wise to bury the result. Back in June, PCCW said banks were giving indicative interest rates in line with those available to a single ‘A’ credit; it would be interesting to see if that is still the case.

3G misery

One eventuality PCCW will be hoping doesn’t arise is an auction of 3G licences in Hong Kong. Its debt burden is already about as much as it can stomach, cheap equity financing is a pretty distant dream and senior management’s plate is full enough without having to address tricky questions such as the worth of a licence – and whether PCCW can afford it.

Odds are the Hong Kong government will defy logic and grant PCCW a reprieve by holding a beauty contest instead. It has already handed PCCW the rights to the cyberport project – a mainly residential property development, which, if precedent is anything to go by, should have been auctioned.

Also, it is widely believed that the Hong Kong government’s masters in Beijing were the driving force behind PCCW’s audacious takeover of C&W HKT; certainly Bank of China put up more dollars than any other bank. It would be a little harsh to have talked PCCW chairman Richard Li into such a move and then leave him unable to compete. Still, it will be amusing hearing the Hong Kong government explain the need to raise money via the privatization of the MTR but not the auction of 3G licences.