HISTORY, DEVELOPMENT AND THE RESTRUCTURING EXERCISE

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1 History and business development The Group s history dates back to 1925 when it first commenced its domestic fixed-line telephone services in Hong Kong through a predecessor entity. It then commenced its international telecommunications services in Before the liberalisation of the Hong Kong fixed-line telecommunications market in 1995 and the liberalisation of the Hong Kong international telecommunications market in 1998, the Group was the sole operator in Hong Kong to provide domestic fixed-line and international telecommunications services respectively. In 1996, the Group launched its first Internet interactive multimedia service under the brand name of NETVIGATOR. 3rd Sch (21) Pacific Century CyberWorks Limited (now known as PCCW Limited) acquired the Group through the merger of PCCW and HKTL in Pacific Century CyberWorks Limited was later renamed as PCCW Limited on 9 August 2002 and the Group has operated its business under the brand name of PCCW since then. In 2005, China United Network Communications Group Company Limited (formerly China Network Communications Group Corporation) acquired a 20% interest in PCCW and became the second largest shareholder of PCCW. In line with PCCW s focus on delivering innovative broadband products and services to maintain its leading market position, its premium on revenue per customer, and its strategy to expand into new revenue streams, among others, PCCW launched its 24-hour pay-tv IPTV services under the brand name of now TV in Hong Kong in September In June 2005, the Group re-entered the mobile telecommunications business by acquiring SUNDAY Communications Limited and creating a new brand, PCCW mobile. With the aim of diversifying PCCW s existing business and enhancing growth prospects, this acquisition allowed the Group to enter the wireless communications, data services and 3G market in Hong Kong, expand its product and service offerings into the mobile market, and promote such products and services so as to improve its ability to serve customer needs. The business of the Group was further expanded by the launch of eye Multimedia Services, an innovative solution to elevate voice communications via the fixed-line, which has been in operation since In 2007, the Group launched a unique wireless broadband solution under the brand name of NETVIGATOR Everywhere, which automatically detects and selects the best connectivity among the Group s Wi-Fi, HSDPA and 3G capabilities, making it the first provider to integrate Wi-Fi and mobile networks in Hong Kong. To satisfy a growing demand for high speed Internet access, the Group launched PCCW 1000M+, which combines Fiber-optic connectivity with wireless broadband services with speeds of up to 1,000 Mbps and provides high speed connectivity to its customers. In 2008, PCCW started to provide Wi-Fi hotspots, which provide free wireless Internet access services to all citizens by installing Wi-Fi facilities at designated government premises under the Government Wi-Fi Programme ( GovWiFi ), and to provide free Wi-Fi at public housing estates as part of its contribution to Hong Kong s technology excellence. In the same year, PCCW became the first Wi-Fi player in Asia to offer a public service on rolling stock by providing connectivity throughout 11 Airport Express trains. Phase one of the GovWiFi was completed in June 2008 and the number of PCCW Wi-Fi hotspots throughout the city exceeded 5,000 in the same year. As at the Latest Practicable Date, the number of PCCW Wi-Fi hotpots exceeded 9,

2 In the fourth quarter of 2008, PCCW completed a corporate reorganisation which grouped its telecommunications services, media and IT solutions businesses under HKTGH with the aim of improving PCCW s operational efficiencies. Key features of the 2008 Restructuring were as follows: B1-Q38 (a) (c) (d) (e) to consolidate the essential telecommunications assets and business into one new operating entity namely, Hong Kong Telecommunications (HKT) Limited. Into this company was injected the business and assets of HKTC which was then operating the fixed line telecommunications business, the network assets of PCCW Mobile HK Limited which was then operating the mobile business and other related telecommunications businesses from elsewhere in the PCCW Group; to create a more ordered structure for the global telecommunications businesses (under HKT (International) Limited) as distinct from the domestic telecommunications businesses (under HKT (Hong Kong) Limited); to consolidate the Media Business under Media Holdings; to consolidate the Solutions Business under Solutions Holdings; and to consolidate each of the Telecommunications Business, the Media Business and the Solutions Business under HKTGH. The transfer of the aforementioned businesses to HKTGH was effected by the transfer of assets and liabilities primarily from HKTC to a subsidiary of HKTGH, and transfer of the entire equity interests in a number of entities, including Cascade Limited, PCCW Global Limited, PCCW Mobile HK Limited, PCCW Media Limited and PCCW Solutions Limited, to subsidiaries of HKTGH. The considerations of the transfers were determined with reference to the then fair values of the businesses transferred. Goodwill arising from the 2008 Restructuring represented the difference between the transfer considerations and the fair values of the identifiable assets and liabilities of the accounting acquirees. The goodwill of Trust Group as at 31 December 2008 was approximately HK$35,688 million, please refer to notes 19 and 36(a) of the Accountant s Report in Appendix I to this document for further information. In 2009, the Group made a successful bid for a licence in partnership with Hutchison Telecommunications Hong Kong Holdings Limited to operate within the MHz spectrum band for the purposes of providing high speed 4G data services. In the same year, the Group launched PCCW eye2 which enables users to make video and voice calls as well as to choose from more than 100 types of infotainment and interactive services wirelessly around the home through a Wi-Fi enabled portable device. In line with the Group s growth strategy for its contact centre business, the Group s contact centres business acquired a 70% interest in each of the two companies operating contact centres in the Philippines, the U.S. and Panama in August The acquisition has not only facilitated the Group s access to the United States, the largest contact centre market in the world, but has also enhanced the Group s ability to provide cost-efficient multi-lingual customer services. It further acquired an additional 15% interest in the company which operates contact centres in the U.S. and Panama in The operation has since become one of the few centres used by its top international brands customers to serve their worldwide customer needs. In 2011, PCCW completed a further restructuring of Reach Ltd. to restructure the majority of Reach Ltd. s operations to more closely align with the business objectives of Reach Ltd. s shareholders as well as to more efficiently and effectively serve their respective customers. Such restructuring involved a division of the majority of Reach Ltd. s assets, business platforms and operations between its two shareholders (and their respective groups) and was implemented through a series of services agreements, share B1-Q40 125

3 transfer agreements, asset transfer agreements and other miscellaneous management agreements. The total consideration for the acquisition of such assets, business platforms and operations was approximately US$82.6 million. Please refer to the section headed Statutory and general information Further information about the business Summary of material contracts in Appendix V to this document for details of the restructuring documents. In the same year, the Group successfully switched high definition video conference demo over 4 continents across Africa, America, Asia and Europe. Overview of the Restructuring PCCW implemented the Restructuring to establish the HKT Trust, the Company and the ownership structure of the Telecommunications Business. The Restructuring was implemented in the manner described below. Details of the Restructuring The Restructuring comprises two stages: Stage 1: Transfer of certain businesses out of HKTGH, such that HKTGH will hold only the Telecommunications Business. Stage 1 of the Restructuring comprises the following steps: (a) (c) (d) (e) CAS Holding No. 1 Limited has established two new BVI investment holding companies, being Esencia Investments Limited and Great Epoch Holdings Limited, to act as an intermediate holding company of the Media Group and to act as an intermediate holding company of the Solutions Group, respectively. Transferring HKT Network Services Limited and, indirectly, its three subsidiaries, PCCW-HKT Business Services Limited, PCCW-HKT Technical Services Limited and Pacific Century CyberWorks Solutions (Macau) Limited, from a subsidiary of HKTGH to PCCW Network Services (China) Limited, a company within the Solutions Group. The consideration for this transfer of HK$214.2 million, being an amount equal to the fair market value of HKT Network Services Limited, will be settled on the basis of an inter-company balance left outstanding. ( ) (PCCW (Beijing) Limited # ), a company within the Group, will transfer certain employees and assets relevant to the Group s business to members of the Group. Thereafter, the Group will transfer the entire registered capital of ( ) (PCCW (Beijing) Limited # ) to the Remaining Group. The consideration for this transfer of HK$51.8 million, being an amount equal to the fair market value of ( ) (PCCW (Beijing) Limited # ), will be settled on the basis of an inter-company balance left outstanding. PCCW-HKT DataCom Services Limited and other relevant companies within the Group, will transfer, at nominal consideration, certain Intellectual Property Rights to the Remaining Group. Transferring the Solutions Group s 76.43% interest in Unihub Global Network Technology (China) Limited and thereby its 50% interest in ZhongYing JV, which is currently under the Solutions Group, # unofficial name 126

4 to a company within the Group. The consideration for this transfer of HK$126.5 million, being an amount equal to the fair market value of the Solutions Group s 76.43% interest in Unihub Global Network Technology (China) Limited, will be settled on the basis of an inter-company balance left outstanding. (f) (g) (h) (i) (j) (k) Transferring Pacific Century Cable Holdings Limited, a company within the Remaining Group, and thereby its 50% interest in Reach Ltd., from PCCW to the Company. The consideration for this transfer of HK$70.6 million, being an amount equal to the fair market value of Pacific Century Cable Holdings Limited, will be settled on the basis of an inter-company balance left outstanding. Reach Ltd. is a 50/50 owned joint venture formed in 2000 between PCCW and Telstra Corporation Limited ( Telstra ) and provides international communications infrastructure services, principally to PCCW and Telstra. The operations and services provided by Reach Ltd. are telecommunications related and are more in line with the businesses of the Group than the Remaining Group. Therefore, PCCW s interest in Reach Ltd. was transferred to the Group through the transfer of Pacific Century Cable Holdings Limited to the Group as part of the Restructuring. Transferring Media Holdings and, indirectly, its subsidiaries from HKTGH to Esencia Investments Limited, a new intermediate holding company of the Media Group, immediately under CAS Holding No. 1 Limited. This transfer will be effected by way of a distribution in specie of the shares in Media Holdings and the contribution of those shares to Esencia Investments Limited. HKTGH will declare and pay a dividend to CAS Holding No. 1 Limited of an amount equal to the carrying cost of Media Holdings. Transferring Solutions Holdings and, indirectly, its subsidiaries, from a subsidiary of HKTGH to Great Epoch Holdings Limited, a new intermediate holding company of the Solutions Group, immediately under CAS Holding No. 1 Limited. This transfer will be effected by way of a series of distributions in specie of the shares in Solutions Holdings and the contribution of those shares to Great Epoch Holdings Limited. HKTGH will declare and pay a dividend to CAS Holding No. 1 Limited of an amount equal to the carrying cost of Solutions Holdings. Hong Kong Telecommunications (HKT) Limited, a member of the Group, will assign the benefit of two technical services agreements to PCCW Solutions Limited, a member of the Solutions Group. The consideration for this transfer is HK$59.0 million, being an amount equal to the fair market value of these agreements. As between the Group and the Remaining Group, the inter-company balances applicable to both trading operations and non-trading matters (for example, shareholder s loans and the balances arising out of the Restructuring steps set out above) will be transferred and set-off such that a single net balance will be owed by HKTGH to CAS Holding No. 1 Limited. HKTGH will issue one new ordinary share to CAS Holding No. 1 Limited to capitalise the net inter-company balance. The Restructuring steps referred to in paragraphs (a) to and (d) to (f) above will be completed prior to [ ], while the remaining steps referred to in paragraphs (c) (1) and (g) to (k) above will occur shortly before [ ]. Note: 1 The transfer of ( ) (PCCW (Beijing) Limited # ) to the Remaining Group under the second part of paragraph (c) above is subject to the approval of the relevant authorities in the PRC. # unofficial name 127

5 Completion of the transfers of Media Holdings and Solutions Holdings in Stage 1 of the Restructuring will trigger an obligation for Hong Kong Telecommunications (HKT) Limited, the major operating company under the Group, to make a mandatory repayment of the outstanding amount under its existing syndicated and bilateral facilities from third party commercial banks. The amount of such repayment will be determined by reference to the value of the assets being transferred out of HKTGH. There will also be a pro rata reduction in the relevant undrawn portion of such syndicated and bilateral facilities from third party commercial banks. The total available size of the syndicated and bilateral facilities of Hong Kong Telecommunications (HKT) Limited was HK$26,330 million, of which HK$15,775 million was the outstanding amount as at 30 September Hong Kong Telecommunications (HKT) Limited is expected to meet the mandatory repayment obligation within 15 business days of the completion of the transfers of the Media Business and the Solutions Business out of the HKTGH group. Hong Kong Telecommunications (HKT) Limited has sufficient resources including new banking facilities in place for the mandatory repayment which is estimated at approximately HK$10.1 billion, by reference to the fair market value of the transfers of Media Holdings and Solutions Holdings. Following completion of Stage 1 of the Restructuring, HKTGH will hold only the Telecommunications Business. The Media Business, the Solutions Business, the Property Business and the Other PCCW Businesses will continue to be held by PCCW and/or its wholly-owned subsidiaries and will be held separately from (and outside of) the Group under HKTGH. Stage 2: Transfer of the Telecommunications Business to the Trustee-Manager. Stage 2 of the Restructuring comprises the following steps: (a) CAS Holding No. 1 Limited, a wholly-owned subsidiary of PCCW, will transfer the Telecommunications Business to the Company, by transferring the entire issued share capital of HKTGH (and, thereby, its subsidiaries) to the Company at fair value equivalent to the value of CAS Holding No. 1 Limited s percentage share of the Company s market capitalisation on [ ]. The consideration will be settled by the allotment and issue of 4,363,361,192 new Ordinary Shares and 4,363,361,192 new Preference Shares and the issue of a promissory note by the Company to CAS Holding No. 1 Limited on completion of the transfer. CAS Holding No. 1 Limited will transfer the entire issued ordinary share capital of the Company (comprising the 4,363,361,192 Ordinary Shares referred to above, plus the 15,600 Ordinary Shares previously in issue) to the Trustee-Manager in its capacity as the trustee and manager for the HKT Trust, in consideration for 4,363,376,792 Share Stapled Units (within which would comprise the 4,363,376,792 Preference Shares already then held by CAS Holding No. 1 Limited) jointly issued by the HKT Trust and the Company to CAS Holding No. 1 Limited. The transfer of HKTGH to the Company and the transfer of the entire issued ordinary share capital of the Company to the Trustee-Manager in its capacity as the trustee and manager for the HKT Trust will occur shortly before [ ]. 128