UPDATE 1-Bain, Carlyle among bidders for PCCW unit-sources

Fri Aug 29, 2008 7:09am EDT

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By Michael Flaherty

HONG KONG Aug 29 (Reuters) - Bain Capital and Carlyle Group are among the private equity firms through to the next round of bidding for a stake in the telecom unit being spun out of Hong Kong's PCCW (0008.HK), according to sources.

A deal, expected to come late this year, could fetch $2.5 billion.

Two sources involved in the deal said Goldman Sachs's (GS.N) private equity arm was considering joining TPG Capital in its own offer for the unit, though they could not confirm that the two had officially linked up.

Sources also said Apax Partners moved into the next round of bids, due in mid to late October.

PCCW, Hong Kong's former monopoly fixed-line carrier, said in May it planned to fold its core media and telecoms businesses into a separate firm called HKT and sell 45 percent of the new company. At the time, PCCW shares had dropped 90 percent since 2000.

The auction pulled in major private equity players from around the globe, attracted to the company's steady cash flows and commanding market position at a time when big, attractive buyout targets are hard to find across Asia.

Sources have told Reuters that the other buyout firms that made it past the first round are: South Korea's MBK Partners, advised by Lehman Brothers LEH.N; TPG, advised by JPMorgan (JPM.N); Providence Equity Partners, advised by Citigroup (C.N); and Australia's Macquarie Group (MQG.AX), advising itself. TPG and Macquarie tried to buy PCCW assets in 2006.

Sources said Bain is being advised by Morgan Stanley (MS.N), Carlyle is being advised by Deutsche Bank (DBKGn.DE), and Apax is being advised by Merrill Lynch MER.N. Like any auction, bidders and partnerships could drop out or be added on at any time.

All six firms declined to comment. Goldman Sachs, PCCW, and UBS (UBSN.VX) --the bank running the auction--also declined to comment.

HKT will consist of three PCCW businesses: information technology, telecommunications, and media.

PCCW hopes to spin off HKT into a publicly traded division. PCCW's broadband TV arm, called nowTV, is the world's largest provider of IPTV. The company also controls a property unit.

Buyout firms are smitten with HKT's cash flows, though completing and profiting from such a deal are seen as no easy task. Private equity firms will be limited in how much money they can borrow to purchase the stake, a factor likely to pinch their potential investment returns from the deal.

In addition, any deal involves coming to an agreement with a complex mix of characters, including the Chinese government and PCCW chairman Richard Li, the younger son of Hong Kong's richest man, Li Ka-shing.

Chinese government-run China Netcom (0906.HK) owns nearly 20 percent of PCCW and played a role in thwarting PCCW's last attempt at selling assets. Li, 41, has long tried to extricate himself from the company to pursue other deals.

(Editing by David Cowell)