It’s been quite a journey for the long-suffering shareholders of PCCW since the merger with Cable & Wireless HKT in 2000. Macquarie Bank’s and TPG Newbridge’s offers for its telecommunications business in 2006 were vetoed. Other attempts to sell the assets came to nothing in 2008, while a privatisation proposal by chairman Richard Li Tzar-kai in 2009 was ruled out by the Court of Appeal. And in April, the exchange  rejected PCCW’s application to list a business trust – a type of transaction untried in Hong Kong.

Now, PCCW is trying again with a rejigged structure. The spin-off plan is subject to shareholders’ approval in a vote on October 12, with no offer timetable. But because an information pack has been posted on HKEx’s website, soundings to gather cornerstone investors might be under way.

To be sure, the Hong Kong telecoms group is proposing a complicated structure, which might discourage investors who have lost a lot of money on PCCW shares, who may be wary of the firm’s skill with financial engineering, and who might be looking for simplicity and transparency.

This complexity, combined with the fact that a spin-off was vetoed thrice before (depending on who’s counting) and that this latest iteration arrives amid a sagging market, suggests it could be a challenging sell. PCCW’s decision to go with such a structured IPO needs some explaining.

The scheme involves PCCW spinning off its telecommunications business to a trustee-manager. This includes its local telephone and data, broadband and international telecommunications services, as well as the mobile business. These activities accounted for about 80% of PCCW’s revenue  last year.

The trustee-manager will manage these assets for holders of units in a trust, called HKT Trust, which will have a fixed lifespan of 80 years, minus one day. In turn, HKT Trust will own 100% of the ordinary shares of a company called HKT, representing the economic interest in the telecommunications business.

PCCW will retain between 55% and 70% of the trust’s units, and will retain 100% ownership of the trustee-manager. Unit holders may remove the trustee-manager with a voting majority of 50%, but this remains largely academic so long as PCCW retains majority control.

In other words, investors in the trust will buy economic exposure to PCCW’s telecommunications business. Majority control and full legal ownership will effectively stay with the parent. PCCW may want the offer structured this way to insulate the trust from the need for approvals by minority shareholders that have previously bedevilled it.

Meanwhile, investors in the IPO would have to get their heads around a fairly high-concept security. They  would be buying bundled “share stapled units” composed of: a unit in HKT Trust; a beneficial interest in a share in HKT, held by the trustee-manager; and a preference share in HKT. The share stapled units (and all their components, which cannot be sold separately) would be listed, as would HKT Trust and HKT. There would be one quotation price.

The reason behind this  convoluted arrangement, PCCW says, is to allow PCCW to bundle into a separate vehicle assets free of debt and significant capital expenditure needs, and which should generate a reliable cash flow. This should enable the trust to pay a high, perhaps even double-digit, dividend.

The good news for PCCW shareholders is that, as the trust indicates a good payout, the telecom assets should fetch a premium valuation. PCCW would only spin off its telecommunications business if HKT Trust achieves a minimum market capitalisation of HK$28.6 billion, implying an IPO size well over the equivalent of US$1 billion.

There are pluses for potential investors. While significant borrowings have sapped PCCW’s dividends in the past, HKT Trust would not be allowed to incur debt. It would also distribute 100% of its cash flow as dividends twice a year.

With the minimum market capitalisation for the trust representing a premium of more than 20% of PCCW’s own equity value, the transaction is a good deal for the company and its shareholders. Trust investors, meanwhile, will be lured by the offer of a generous yield. PCCW has disclosed that next year’s dividends should represent at least HK$2.57 billion. The trust units could therefore yield 9-10%. PCCW is clearly hoping this yield will induce investors to invest in a vehicle that has exposure to assets transparently spun off at a significant premium.

The deal would be priced at a price-earnings ratio of 30.9 times – a clear premium to PCCW’s current price-earnings ratio of 12.3 times, and the average multiple of 15 times for  comparable telecoms  companies in Asia. With the proposed trust IPO, PCCW seems to have cracked the holy grail of raising equity and retiring debt for its telecom business without incurring dilution. It seems the deal will be sold on the strength of the dividends, in the expectation that investors will not mind its complexities or the fact that PCCW would effectively retain ownership of the assets.

That said, a high dividend offer could be just what investors are looking for right now. PCCW may also get a clear market to sell its deal – while there are scant other listings competing for dollars – and people might plausibly bite. The next few weeks should show whether investors hang up or make the call, after treading through the legalese.

Philippe Espinasse worked as an investment banker in the US, Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. He is the author of IPO: A Global Guide, published by HKU Press.

[This article was originally published in The South China Morning Post on 3 October 2011 and is reproduced with permission.]

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