PCCW took a big step towards a separate listing of its telecommunications unit yesterday as shareholders voted for the proposed spin-off at an extraordinary general meeting. The bookrunners can now start the pre-marketing for the planned initial public offering, although sources said yesterday that a decision on when to launch has yet to be made.
The company and the banks involved are ready to go quickly though, and pre-marketing could start within the next couple of weeks. And, given that investors are already familiar with the business, the entire IPO process will probably take no more than three weeks, the sources said.
The EGM approval coincided with an improvement in the Hong Kong stock market, which has made bankers somewhat more optimistic about being able to execute at least a portion of the new-issue pipeline before the end of the year.
However, when it comes to PCCW’s telecom business, bankers don’t really want the market to improve too much. The business will list in the form of a trust that will distribute most of its operating cash flow to unitholders, which means it will be quite defensive in nature — in other words, the type of stock that has the biggest following in a difficult market environment.
“The market cannot be impossible, as it has been in the past couple of months, but they also don’t want a huge shift in favour of cyclicals,” said one source. “If markets are ripping, nobody wants to buy defensive stocks.”
However, few observers dare to believe in a strong turnaround in global stock markets, even if the Hang Seng Index has gained 12.8% in the past five days. As a result, the PCCW trust, which will be listed under the name of HKT Trust, could well be one of the largest IPOs in Hong Kong during the rest of this year.
PCCW said in a statement last month that it will only proceed with the spin-off if HKT Trust achieves a minimum valuation of HK$28.6 billion ($3.7 billion) through the global offering. If that fails and PCCW decides to go ahead at a lower valuation, it will have to return to shareholders for another approval.
PCCW is planning to sell between 25% and 36.7% of HKT Trust to investors, and at the top end of that range the company has estimated that the net proceeds will be approximately $1.3 billion. If the greenshoe is exercised in full, this could increase to $1.5 billion, while the free-float will be 40%. This calculation is based on the company’s cashflow projections for 2012 and assumes a price per unit that translates into a 9% dividend yield. Asian telecom companies as a sector are trading at an average yield of about 6.5%, so a 9% yield does suggest the company is prepared to offer quite a significant discount to get the deal done.
If the company succeeds in selling only 25% of the trust, the net proceeds will be about $873 million, based on the same assumptions.
Most of the company’s existing shareholders had no objections to the proposed spin-off, which is expected to enable the group to distribute a bigger portion of the earnings from the telecom business to shareholders. According to an announcement, shareholders representing approximately 99.97% of the shares present at the EGM voted in favour of the spin-off. The meeting was attended by 586 shareholders, representing slightly more than 60% of the total share capital.
While expected, the shareholders’ approval would have come as a relief for the company’s chairman and controlling shareholder, Richard Li, who has made several unsuccessful attempts to restructure or privatise PCCW in the past five years amid a lagging share price. By offering to return the telecom business to the market in the form of a trust more than 10 years after PCCW bought it from Cable & Wireless, it appears he has finally come up with a solution that is acceptable to minority shareholders as well.
PCCW’s share price has fallen 17.7% since the company issued a statement in early September saying it planned to go ahead with the spin-off, reflecting in part the fact that the telecom business makes up a large portion of PCCW’s earnings. In the first six months of this year, it accounted for 78% of its consolidated revenues and 96% of its Ebitda. However, the rest of the market has also been under pressure in the same period.
As the bulk of the IPO proceeds will be used to pay off debt held by the telecom business, the listing of HKT Trust is expected to free up cash that can be invested in PCCW’s remaining growth businesses, which comprise media, including the Now broadband TV business; IT solutions; and properties. PCCW is among the TV operators that have applied for a licence to provide free-to-air TV services in Hong Kong. If successful, this will give the company access to a significantly larger advertising market than the one it is currently tapping into through pay-TV operator Now.
Some 10% of the HKT Trust IPO will be set aside for existing PCCW shareholders in the form of a preferential offering, which can be upsized to 30% depending on demand. After the listing, PCCW will also distribute an additional 5% of HKT Trust’s share capital to its existing shareholders for free. This means that PCCW’s stake in HKT Trust could drop to as low as 55%.
The pending listing is interesting not just because it will give investors a chance to once again invest directly into one of Hong Kong’s largest providers of fixed-line, mobile and broadband services, but also because it will be the first Hong Kong-based company to go public since asset manager Value Partners listed in November 2007, Dealogic data show. These days, most Hong Kong listings are either by Chinese companies, or by international companies that want their shares to be traded close to their customer base in Asia.
Depending on how much of HKT Trust is sold, it could also be the largest IPO by a Hong Kong-based issuer since Link Reit raised $2.8 billion in November 2005. The largest deal since then was the $820 million IPO by Kingboard Laminates in December 2006.
PCCW has hired CICC, Deutsche Bank and Goldman Sachs as joint sponsors, joint global coordinators and bookrunners for the offering. DBS, HSBC, J.P. Morgan and Standard Chartered are joining them as bookrunners.
