Hutchison's vanishing partners raise more doubts on 3G
To proceed with any unilateral course of action requires steely determination that you remain on the right path, especially when wavering allies jump ship and everyone else seems to be against you. Therein lies the ongoing challenge of Hutchison Whampoa's first move on the third-generation (3G) mobile market.
As the conglomerate gears up for a spring offensive on its European front line, the issue of missing handsets has been replaced by vanishing partners and nervous bankers. If these insiders with a view from the front line are losing faith, investors might need to take another hard look at the costs of Hutchison's bold call on 3G.
It was perhaps not unexpected when financially troubled KPN Mobile pulled its 15 per cent stake in 3UK last November. But now, strategic partner NTT DoCoMo is reputedly set to retreat from its foray into the British 3G arena.
The Japanese mobile data pioneer is unhappy that its i-mode service was deemed surplus to requirements by 3UK and is ready to cash in what is left of its 20 per cent, ?1.2 billion (HK$17.28 billion) stake in the venture. With Hutchison the only likely buyer, the price will probably be only a few cents in the dollar.
And this week it appears that a ?1.5 billion syndicated loan will be sold back to parent Hutchison a year ahead of schedule. The motivation for the early repayment by Hutchison remains ambiguous.
Hutchison notes it can secure cheaper financing. The ?1.5 billion loan is priced at Libor of 4.6 per cent plus 225 basis points, which compares with its last US$5 billion bond issue, priced at 190 basis points over the 10-year US treasury.
It could also point to the benefit of having liabilities in a depreciating US dollar, rather than a strong sterling with British revenues still meagre.
But the beauty of this loan was that the higher cost came with what bankers call a non-recourse feature. This meant that if 3UK did go belly-up, creditors would not come looking for the parent to pay up.
Inevitably, there will be a suspicion that Hutchison pre-emptively moved to pay off the loan before the defined revenue covenants, which coincidently began to kick in this month, were breached. With subscriber targets falling well short last year, such a scenario is not improbable. Better then to knock any problem on the head, rather than risk the symbolic withdrawal of bank financing.
In any case, if Hutchison does become a 100 per cent owner, rather than just the majority partner, the concept of non-recourse funding looks increasingly difficult to justify.
The upshot is Hutchison and its investors are left holding an increasingly large exposure to 3G, whether or not the costs of funding are going up.
Granted the market has already priced in bad news on 3, with Hutchison trading with a zero value ascribed for its 3G assets by most forecasts. But it could get worse if this cash drain begins to affect other divisions, either by redirecting investment cash flows or reducing the group's financial flexibility.
For now, the hope is newer and better phones will spur usage and revenues. But later this year, another obstacle will materialise for Hutchison's 3 - existing European operators, replete with armies of 2G subscribers, will join the fray and launch their own 3G services.