Hutchison Whampoa

How Li puts Essar deal proceeds into use still a puzzler

PUBLISHED : Thursday, 15 February, 2007, 12:00am
UPDATED : Thursday, 15 February, 2007, 12:00am

Investors of Hutchison Telecommunications International can be happy that Li Ka-shing has again worked his magic and closed another profitable deal for them but now they are left wondering what will happen to the cash and how the company will replace one of its star earners.

Hutchison Telecom on Monday said it had sold its 67 per cent stake in its Indian mobile-telephone business Hutchison Essar to Britain's Vodafone Group, booking a pre-tax gain of HK$75 billion on the fast-growing enterprise.

Shares of Hutchison Telecom took a hard fall following the news of the deal even though the HK$86.5 billion price tag was seen as satisfactory and in line with expectations, with the market already having priced those gains into the shares over the past 12 months.

The company's shares made a small recovery yesterday, gaining 12 HK cents to close at HK$16.40 but they remained well below the pre-announcement price of HK$19.20 as investors worried over what would become of the cash.

'The weakness in the shares [stems from] the uncertainty over how [Hutchison] will handle the cash. We don't know how much of it they will distribute as a special dividend and how they'll use the remaining cash,' said Everbright Securities analyst Wong Chi-man.

Even though the company said all options were on the table, including using the proceeds to cut debt, to pay out a special dividend or to fund new investments, it has not committed to any plan of action, meaning hopes for a dividend payout could still be dashed.

'We have ideas on what the way forward should be but we need a couple of days to crystallise those ideas,' said Hutchison Telecom spokeswoman Mickey Shiu.

And that leaves investors waiting for another week with the company planning to unveil its plans on Thursday next week.

Analysts do expect Hutchison to deliver some of the cash to investors via a dividend payment but how it would be distributed is anyone's guess. And, perhaps more importantly, they are wondering what will happen to the rest.

Dividend payments would help pad the pockets of Hutchison Whampoa, the parent and 49 per cent shareholder, and give the average investor something to smile about but they do not translate into future growth. The deal traded a fast-growing asset for cash that needs a home.

'Hutchison Essar is the crown jewel of Hutchison Telecom's business portfolio, contributing more than 90 per cent of its ... valuation and more than half of the company's ebitda [earnings before interest, tax, depreciation and amortisation],' Marvin Lo, an analyst at BNP Paribas Securities, said in a report. 'The disposal of Hutchison Essar means a temporary loss of focus, at least in the eyes of investors.'

He added: 'Of course, we do not rule out the possibility that Hutchison Telecom will nurture another Hutchison Essar in the future. This potential is unlikely to be recognised by the market in the short term.'

That puts pressure on Hutchison Telecom to find a new project with similarly bright prospects to reassure investors the proceeds will deliver long-term gains but the company's assets in growing markets such as Indonesia and Vietnam are still a long way from being profitable.

While growing markets such as Indonesia are likely candidates, the firm will be hard-pressed to find an investment as good as they had.

'We see no targets in the same league or size as Hutchison Essar for now,' wrote Citigroup analyst Anand Ramachandran in a research report.

The idea of using the cash to buy Hutchison Whampoa's European third-generation mobile-phone assets - burdened by HK$100 billion of debt - and thereby remove a weight from around the parent's neck has been mooted by many but just as quickly shot down as the price tag of that business would be too high for Hutchison Telecom, even with its new supply of cash.

So, for now, the Essar deal helps support Hutchison Whampoa chairman Mr Li's reputation as a shrewd dealmaker and gives his hometown investors reason to stick with his companies but Hutchison is still left staggering under the weight of its 3G mistakes.

'This helps but the real test remains the 3G mess and until they've shown investors how they can sort that out, the outlook won't be clear,' said Rob Hart, an analyst at Morgan Stanley.