Analysts cautioned, though, that PCCW may face heavy capital commitments to help Sunday roll out its third-generation (3G) mobile service, and this could accelerate the decline of its fixed-line business, where it is the market leader.

PCCW's offer of HK$0.65 per Sunday share is a 22.6 percent premium to its last closing price of HK$0.53 on Friday. Both Distacom Communications, Sunday's largest shareholder at 46.1 percent, and USI Holdings, the second largest at 13.7 percent, have agreed to the offer.

PCCW and Sunday shares were suspended from trading Monday.

People who bought Sunday shares at the initial public offering price of HK$3.78 in 2000 at the height of the technology boom stand to lose 83 percent on the takeover by PCCW.

Three years ago, PCCW completed a strategic withdrawal from the mobile phone business by selling the remaining 40 percent of CSL - the most profitable of Hong Kong's mobile operators on an average revenue per user basis - to Australia's Telstra. In all, CSL cost Telstra US$2.29 billion.

``Though the CSL sale strengthened PCCW's balance sheets, from an operational point of view, it was probably a mistake,'' a US investment bank analyst said.

``Having its own mobile business would have provided PCCW with a hedge against the loss of fixed-line user traffic to mobile,'' the analyst said.

Francis Cheung, head of telecoms research at CLSA, said he was surprised to see PCCW buy the smallest 3G player in the market, and he predicted that turning Sunday around would put further strain on PCCW's core fixed-line business.

PCCW founder, chairman and largest shareholder Li allowed that transforming Sunday's business would take four to five years. ``We hope to turn this [Sunday] network, which has a small-spending customer base, into something like CSL. CSL has the highest ARPU [average revenue per user] in Hong Kong,'' Li told RTHK radio Monday.

PCCW's share of the fixed-line voice market in Hong Kong declined to 67 percent at the end of last year from 69 percent a year earlier, and revenues from telephony services fell 12 percent to HK$5.3 billion. However, sales of homes in its Cyberport luxury development helped it return to a net profit of HK$1.63 billion in 2004, following a loss of HK$6.1 billion in 2003.

As for Sunday, the costs of rolling out its 3G network dragged it to a HK$13 million net loss in the second half last year.

Also last year Sunday signed a loan agreement with Huawei Technologies, committing the mainland telecoms equipment giant to supply it with 3G network equipment worth HK$1.2 billion. The loan must be be repaid in eight installments starting in June 2008.

Huawei owns 8.1 percent of Sunday.

``Sunday's business will benefit from more financial muscle, and through the deal the business will have access to not only PCCW's finance, but also its infrastructure,'' another analyst said.

The move could trigger more consolidation in the mobile industry. ``The market had three strong 3G players, and now it has four, so the pressure will be on the non-3G operators, namely Peoples and New World Mobility,'' the analyst said.

``The success of this deal will depend on PCCW's ability to offer bundled fixed and mobile services to customers,'' said Andrew Chetham, principal analyst at industry research firm Gartner. ``However, Hutchison has run both fixed and mobile services in Hong Kong for years and this did not appear to have benefited them.''

The Sunday deal could mark an important shift in PCCW's technological strategy.

``PCCW previously indicated it would be developing its mobile business through broadband wireless access technologies such as Wi-Max, and not on cellular technologies such as 3G,'' said a European investment bank analyst. ``The move [to acquire Sunday] was therefore a surprise.''

PCCW has so far invested about US$50 million in its wireless broadband business in Britain, and said it was awaiting the outcome of a consultation exercise on mobile licensing by the Office of Telecommunications Authority in Hong Kong before launching similar services locally.

mark.lee@singtaonewscorp.com

kc.wong@singtaonewscorp.com