LONDON, June 7: Shares in Cable and Wireless Plc surged on market hopes that Britain's second biggest telecom company was poised to seal a deal with China, ending some uncertainty over the future of its biggest asset — Hong Kong Telecom.

The stocks surged after Hong Kong Telecommunications Ltd announced that C&W was in discussions with China on future cooperation.

"We understand that these discussions are continuing but there is no certainty as to how and when these will be concluded or as to their effect in relation to Hong Kong Telecom," the company said in a statement.

C&W, which declined to comment further, has said it has been in talks with China for some time. But the statement fuelled market hopes that a deal was imminent.

With Hong Kong reverting to Chinese rule at midnight in just 24 days, analysts expect C&W to be encouraged to reduce its near 59 per cent stake in the main telephone service provider on the island -- in return for growth opportunities on the booming Chinese mainland.

A sharp rise in Hong Kong Telecom's (HKT) shares to a new year high of HK$19.25 also assumes significant mainland Chinese access, analysts say.However, some experts say that although the potential for growth in China is indisputable, the ability to make attractive returns from investments in that growth remains unproven.

But with a deal widely expected, analysts are now focusing on how big a stake C&W would sell, at what discount, whether the Chinese would offer an asset swap -- or if C&W gets cash, how it would match the hefty returns HKT used to generate when reinvesting disposal proceeds.

"There could be a scenario whereby Hong Kong Telecom just swaps some assets with the Chinese...in return for a certain percentage in HKT which would solve the Chinese cash burden," said one analyst, who declined to be named.

"They have to lay a lot of lines over the next couple of years. Then it's a question of what the Chinese are going to give up? You're not going to be running the Beijing telephone company," he added.

China has already secured a 7.74 per cent stake in Hong Kong Telecom at a 15 per cent discount via a company called China Everbright Group, which is directly under the supervision of China's State Council.

"Holdings in other British-controlled Hong Kong companies have in the past been sold to the Chinese at substantial share price discounts," notes C&W's brokers, ABN AMRO Hoare Govett.

But it adds: "A deal in Hong Kong would reinforce the bull case for C&W by removing uncertainty over prospects, while underpinning sum of the parts valuations of the company, which suggests that the shares are worth around 650P."

Few analysts believe C&W will want to lose majority control of HKT, which contributes 65-70 per cent of its profits and offers a robust return on equity of 49 per cent, according to Reuters Security 3000 data.

But some say the British company may have to reach a compromise with China, albeit "kicking and screaming".Nevertheless, a sale could leave C&W with 1.0 billion pounds ($1.6 billion) or more to invest.Deals tipped by experts include a share buyback or special dividend at both C&W and HKT, buying the remaining 50 per cent in C&W's mobile venture from its joint-owner, US West Inc, or telecom investments in the Chinese mainland.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.