HK Broadband Network on Monday started pre-marketing of its planned Hong Kong IPO, which could net the company at least $500 million.
Executives will meet prospective investors in the two weeks leading up to Chinese New Year, with books scheduled to formerly open after the holidays.
There are no details as yet of an indicative price range, number of shares or an estimated valuation, with sources close to the deal noting these details will come out in the week of February 16.
The deal will consist entirely of secondary shares, with all of the proceeds from the IPO going to the company's main backer, private equity firm CVC Capital Partners, and HKBN's management.
In 2011, CVC acquired HKBN from City Telecom in a deal valued at HK$5 billion, which at the time was the biggest leveraged buyout in Hong Kong. CVC now owns 70.7% of HKBN.
Goldman Sachs, JP Morgan and UBS are lead bookrunners on the deal. CLSA is a joint bookrunner.
Industry outlook
HKBN is the largest provider of above fibre broadband services in Hong Kong by the number of residential subscriptions, with a market share of 53.7% of the residential fibre broadband market as of August 31, 2014, the company said in its A-1 filing.
It also ranks second as the city's provider of residential and corporate broadband and telecoms services, with main competitors including Richard Li's HKT Trust & HKT, the largest broadband provider; tycoon Li Ka-shing's Hutchinson Telecommunications Hong Kong; and i-Cable Communications.
One of the unique selling points is that HKBN, which already commands a large chunk of the Hong Kong broadband market, still has plenty of room for growth.
In the past few years, the broadband industry has undergone rapid transformation as subscribers shift from copper to fibre broadband services.
According to Media Partners Asia (MPA), total residential fibre broadband subscriptions have grown from approximately 606,000 in 2010 (31.4% of the residential broadband market) to 1.34 million subscriptions (66.3%) in 2014.
Many subscribers are upgrading to fibre services, a shift that MPA forecasts will continue steadily until 2020. It expects fibre broadband subscriptions will total $1.44 million in 2015, $1.548 million in 2016 and $1.65 million in 2017, representing a compound annual growth rate (CAGR) of 5.9%.
The traditional forms of broadband -- DSL (digital subscriber lines) -- will subsequently decrease by 14.8% over the next six years, MPA forecasts.
HKBN, which has invested billions since 2000 to build an expansive fibre network in the city, stands to benefit as the city's residents turn to fibre. As of August 31, 2014, its fixed assets in telecoms, computer and office equipment, leasehold land and buildings, and leasehold improvements totalled approximately HK$4.1 billion.
HKBN reported a net profit HK$53.6 million for the year ended August 31, 2014, compared to a net loss of HK$139 million for the same prior year period.
Turnover jumped to HK$2.13 billion at August 31, 2014, compared with $1.95 billion at August 31, 2013. The jump in turnover reflects the increase in broadband subscriptions for residential and enterprise businesses, as well as higher prices due to up sales and cross sales, according to the A-1.
Comps
HKBN names Hutchinson as a competitor, which is trading at 21.48 times 2014 earnings and is up 5.49% so far this year up to February 8.
However, sources close to the deal say its one true domestic comparable is Li's HKT, noting that most prospective investors will use HKT as a benchmark. HKT is up 26% from February 6, 2014 up to February 8.
Still, it's not a perfect comparison, given Li's conglomerate has such a diverse range of businesses, including television and mobile services.
Indeed, HKT Trust raised $1 billion in a rights issue last July, with the proceeds of the issue going towards paying back a loan HKT Trust took on to acquire CSL New World Mobility, a mobile phone operator it purchased for $2.43 billion from Australia's Telstra Corp.
The key differentiator between HKBN and HKT? HK Broadband only uses fibre optics, while a substantial portion of HKT's subscribers use DSL networks.
CVC's Asian expansion
CVC has been making headway in Asian broadband companies. Most recently, in November, it paid $150 million for a 50% stake in Japanese telecoms carrier Arteria Networks from trading house Marubeni.
CVC also invested $274 million in PT Link Net, the largest broadband and cable network operator in Indonesia in 2011. The private equity firm subsequently upped its investment to 49%, while the Riady family owned 51%.
Link Net held its own flotation in October, raising Rp5.5 trillion ($455 million), but was forced to cut the number of shares on offer amid market turbulence and weak demand.
CVC and Indonesian internet company First Media sold 30% of their combined stake in the broadband and cable TV arm of Indonesia's Lippo Group at Rp6,000 per share, below the initially marketed range of Rp6,200 to Rp6,700 per share.
All of the shareholders sought to sell 40% of the company, with CVC and First Media offloading a combined 33% stake and the remaining 7% set to be sold by two private equity funds. In total, 1.217 billion shares were on offer.
But poor market conditions kept investors on the sidelines and forced the shareholders to reduce the number of shares by 10% in total, to 912.8 million shares.
