Buyout firms TPG Capital and MBK Partners’ joint acquisition of Wharf T&T for HK$9.5 billion ($1.22 billion) looks pricey, especially since the telecoms firm will now face a fierce local competitor in HKBN, according to industry sources.
The funds said on Wednesday they are acquiring Hong Kong’s second-largest fixed line operator from real estate conglomerate The Wharf Holdings.
TPG and MBK Partners are paying about 11.5 times earnings before interest, taxes, depreciation and amortisation and have layered on an aggressive leverage multiple of around seven times, which could equate to returns in the low teens, according to a source familiar with the deal.
Their plan is to take advantage of the natural growth in data usage by businesses, leverage Wharf's capital expenditure on building out a fast fibre network, and boost sales by bringing in new products, according to a person familiar with the matter.
The consortium of private equity firms fought hard for the asset with local fibre broadband services provider HKBN, which had penciled in extensive synergies.
HKBN had offered a higher price than the private equity firms, but it was able to cost in extensive synergies and planned to lay off people where there was overlap between its business and Wharf T&T, the sources said.
During intense negotiations over the weekend the funds and HKBN were neck-and-neck in the race to acquire the asset. But senior management at Wharf, run by Hong Kong tycoon Peter Woo, decided they could not stomach extensive layoffs, one of the sources said.
Wharf’s leadership was also worried about the uncertainty created by a publicly-listed company making an offer, as it would have had to seek shareholder approval for the acquisition. The private equity firms are paying in cash and potentially could close the deal within seven weeks, according to one of the sources.
That was not the only problem the company faced. HKBN also faced a complication created by Wharf’s ownership of i-cable, which is seen as a pet project of Wharf chairman Stephen Tin Hoi Ng. HKBN is a direct competitor to i-cable. Wharf was also worried that HKBN's finances were already stretched and shareholders had voted down their request to be able to issue new shares under Hong Kong's general mandate rule. HKBN recently acquired the telecom business of New World Development.
Among other competitors that dropped out in the early stages of the auction for Wharf T&T as the price spiraled were New York-headquartered private equity firm KKR and Hong Kong telecoms provider SmarTone Telecommunications, the sources said.
HKBN refused to go higher on price, especially given companies owned by private equity firms are likely to be sold within five years of acquisition.
Most of the bidders were not interested in i-cable, which has struggled. There were a couple of low-ball bidders including Nan Hai Corp, owned by Yu Pun Hoi, but so far that has not resulted in a deal.
Slimming down
Wharf said on March 9 it said it was conducting a strategic review of its communications, media and entertainment unit that it started over 20 years ago as the market has since changed drastically and the pace of change has accelerated.
“Wharf initiated a strategic review for our CME business earlier this year to evaluate different options to enhance their value,” said Wharf's Ng.
Wharf T&T is a purely enterprise-focused telecom service provider in Hong Kong, with a fibre optic network covering approximately 90% of the commercial market. The firm has a client base of over 50,000 enterprises in Hong.
Goldman Sachs research analysts suggested that HKBN’s addition of 100,000 new subscribers per year — according to figures from August — should lead to a further concentrated market structure and better price discipline in the industry.
In 2015 the segment under Wharf Communications represented 9% of Wharf Group’s revenue and 1% of Wharf Group’s operating profit.
The price of HK$9.5 billion for Wharf T&T was higher than Credit Suisse Wharf Holdings analyst Susanna Leung expected. She had penciled in HK$7.422 billion. The sale price represents 12 times her estimate of full year 2016 estimated Ebitda.
Wharf is the latest among Hong Kong’s conglomerates to gradually carve off non-core businesses to enhance shareholder value, and also occasionally as the result of family politics.
Li & Fung has sold its Asia consumer and healthcare distribution business to conglomerate Dah Chong Hong. Other recent spinoffs include Great Eagle Holdings, which sold its Langham Hotel assets via a business trust-type structure, and the $3.1 billion divestiture of Hong Kong Electric Investments by Power Assets. Kerry Logistics Network also spun out Kerry Properties and Xinyi Solar was listed by Xinyi Glass.
Fund raising
MBK and TPG are making equal investments Wharf T&T. The North Asian buyout firm MBK, run by Michael Byung-ju Kim, will be making the investment out of its MBK Partners Fund III, L.P. fund. TPG is using its Asia Fund VI. They teamed up during the bidding process.
Both MBK and TPG are capital raising at the moment for pan-Asian funds.
MBK Partners has a long track record investing in Asian TMT assets, including in China Network Systems, Gala TV, Invoice, C&M and Yayoi. However, its investment in C&M, a cable TV operator in Korea now known as D’Live, has struggled and its subscriber base has shrunk, according to a person familiar with the asset.
TPG has invested in a wide range of leading telecom companies across the globe and Asia, including Hanaro Telecom, Asia Netcom (now known as Pacnet), Japan Telecom (now known as Softbank Telecom), Avaya and Apollo Towers.
UBS advised TPG while Goldman Sachs advised Wharf.
