Hutchison to float ports business in Singapore

Hutchison Whampoa announced yesterday that is planning to spin off its port assets in Hong Kong, Macau and China’s southern Guangdong province for a separate listing in Singapore. The choice of Singapore instead of Hong Kong was said to be motivated by the possibility to list the assets as a business trust there, while Hong Kong doesn’t have the regulations in place for such vehicles. A business trust will allow the company to distribute essentially all of its free cash flow as dividends, giving unitholders direct access to the stable revenues generated by this business.

Hutchison Whampoa, which is controlled by Hong Kong’s richest tycoon Li Ka-shing, intends to keep about 25% of the business trust after listing, meaning it will continue to benefit from its growth and development. It will also retain control of the day-to-day operations as the trust will be managed by a subsidiary wholly-owned by Hutchison, which is itself listed in Hong Kong. The company didn’t comment on how much it may seek to raise from the listing, but noted that the assets intended to be included in the initial portfolio had total current and non-current assets of about $5.5 billion at the end of 2009. However, it seems unlikely that Hutchison would do this listing exercise if it didn’t believe it would help realise hidden value, which suggests the eventual valuation will be higher.

Or, as Moody’s senior credit officer Elizabeth Allen put it: “The financial impact of this proposed transaction is uncertain at this point. However, Hutchison Whampoa has a history of monetising its assets at strong valuations.”

Aside from ports, Hutchison’s businesses also include property and hotel development, retail, energy, infrastructure, telecommunications and financial investments. 

Market sources said the deal size is likely to be at least $5 billion and there was talk yesterday of as much as $7 billion. The final size will depend on the amount of debt that will be included in the business, the market conditions at the time of the deal and of course, how much of the trust Hutchison does decide to sell. In addition to a global offering, the company also plans to offer units in the new trust to its existing shareholders on a preferential basis.

Hutchison has mandated DBS, Deutsche Bank and Goldman Sachs as joint bookrunners for the proposed offering, but the marketing to investors will not start until after it receives approval from the Singapore Exchange for the listing – a process that normally takes four to six weeks.

The listing vehicle will be named Hutchison Port Holdings Trust (HPH Trust) and will comprise the deep-water container terminals at Hong Kong’s Kwai Tsing port and at the Yantian container terminals in Shenzhen that are currently part of Hutchison Port Holdings (HPH). It will also include Hutchison’s entire port ancillary interests in the same regional area, including trucking, feedering, freight-forwarding and other logistics services, as well as its economic interests in certain river ports that serve mainly as feeder ports to the two deep-water terminals.

In a statement, Fitch Ratings noted that the assets to be spun off account for roughly half of the Ebitda from Hutchison’s overall ports business, which comprise interests in 308 berths, split on 51 ports in 25 countries across Asia, the Middle East, Africa, Europe, the Americas and Australasia. The Hong Kong and China assets to be transferred to HPH Trust had an estimated Ebitda of HK$4.57 billion ($590 million) in 2009, according to the Hutchison announcement, down from HK$7.71 billion in 2008.

Hutchison had a 60% market share of the throughput at Kwai Tsing in 2009 and a 47% share of the container traffic at the Yantian port in Shenzhen. Together, Hong Kong and Shenzhen ranked as the world’s busiest container port market and trading hub in 2009 with a combined throughput of 39.2 million twenty-foot equivalent units (TEU). Consequently, the company is well positioned to continue to benefit from trades in and out of China, even if economic growth were to slow somewhat from last year’s double-digit rates.

In the announcement, Hutchison said it believes there is “significant potential for economic and trade growth in the Pearl River Delta generally and the port industry is well-positioned to capitalise on such opportunities.” A separate listing will give HPH Trust direct access to the capital markets to support future expansion and will also enable the company to offer management incentives to grow shareholder value. At the same time, the proceeds raised from an initial public offering will allow Hutchison to “continue to expand its ports, infrastructure and other businesses aggressively while maintaining the group’s strong financial profile and continuing to meet [its] stated objective of reducing overall consolidated debt.” 

HPH is an 80% subsidiary of Hutchison Whampoa. The remaining 20% are owned by Singapore port operator PSA International, which is controlled by Temasek Holdings.

At the talked about size, HPH Trust will be by far the largest IPO in Singapore, ahead of Global Logistic Property’s $3.0 billion listing last year. Together with the indication that the trust will have a free-float of as much as 75%, this suggests that HPH Trust should be fairly liquid – an important issue since inferior liquidity is often seen as one of the drawbacks of a listing in Singapore compared to Hong Kong.

HPH Trust is likely to be marketed on a total return basis, taking into account the annual dividend yield as well as the growth prospects. In that respect, the comparables will not only be other container ports businesses like China Merchants (Holdings) International and Cosco Pacific, which are both listed in Hong Kong, but Singapore-listed real estate investment trusts (Reits) as well. The prospective returns are also likely to be evaluated in the context of the Singapore government risk-free rate.

Hutchison’s share price dropped 2.4% yesterday following the spin-off announcement, to HK$93.50 and as of the lunchtime break today had shed a further 1.2% to HK$92.40. The stock is up 78% since the beginning of 2009.