Hong Kong-based fibre optic telecom company HKBN agreed to buy the telecom and online marketing business of New World Development for HK$650 million ($83.48 million) on Thursday, as part of its effort to become Hong Kong’s largest broadband provider.
The transaction marks the latest attempt by the upstart telecom company and internet service provider to aggressively expand its presence in Hong Kong’s competitive market, and could yet be followed by further industry consolidation, Ni Quiaque Lai, chief financial officer and co-owner of HKBN, told FinanceAsia.
“We are buying a company that is highly complimentary – they focus on enterprise solutions. This gives us this business capability overnight which would otherwise have taken four to five years to build,” he said.
“There is clear growth potential; [Hong Kong has] at least a HK$20 billion corporate enterprise [telecom services] market [in terms of revenues], and we have HK$1 billion [market share] now,” Lai added.
The acquisition is being fully funded by a five-year loan for up to HK$700 million from JP Morgan, which was also HKBN’s financial adviser.
Lai said HKBN has been involved in “a two-way discussion for 20 years” with New World and other internet telecom providers about growth and consolidation opportunities. However, HKBN’s initial public offering, in March 2015, had helped solidify its plans to acquire New World’s business.
The New World telecom and marketing business targets mid-tier companies of around 100 employees, whereas HKBN’s business to date has focused almost entirely on providing fibre optic broadband services in homes.
“They have HK$5,000 average revenue per user [per month], whereas we have 39,000 users at HK$1,000 per month,” Lai said.
HKBN has its own fledgling enterprise solutions business, but it is focused upon small businesses of 10 people or less, he added. The combined operations of both companies will create a business with over HK$3 billion in revenue, of which HK$1 billion will come from enterprise solutions.
Unfair advantages
The acquisition will bring HKBN’s debt level to 3.3 times Ebitda, still a comfortable amount for a utility-like business.
Lai noted the loan being offered by JP Morgan was being provided at 185 basis points over Hibor. “That’s lower than the cost of our loan for our IPO,” he said, noting that this deal was in effect an extension of that package, with similar covenants.
HKBN’s immediate plan is to absorb the New World business, shift the personnel into cheaper rental space opposite HKBN’s existing office in Kwai Chung, and then bring in its co-owner-based business model to incentivise managers at the New World business.
The New World business currently has an Ebitda margin of 9%, versus HKBN’s 42%, said Lai. “We don’t think we can raise it to our level, but we can improve it a great deal,” said Lai.
HKBN believes it can reduce the New World division’s annual cash operating expenses of about HK$680 million by 5%-10% from the fiscal year beginning June 2017 onwards. “We have administration and IT in place and we run a low-cost office,” Lai said.
However, HKBN believes the opportunity lies more in growth than in cost cutting. Lai pointed to HKBN’s rapid expansion as a template for growth in the corporate enterprise telecom solutions market.
The company is focused on excelling, and benchmarks its services against services leaders, such as Shangri-La for customer service, and Cathay Pacific for safety standards. It also offers a balanced work-life mixture to its executives to keep them happy and motivated, added Lai. Working days are 9am to 5pm, and the office incorporates table tennis and other relaxation facilities.
Perhaps most importantly, HKBN gets key management to become part-owners “We believe in using Luca, or legal unfair competitive advantages,” Lai said. He noted the company now has 270 co-owners, some of which will be team managers of telecom service operators. “That means people that call in are one layer removed from a co-owner; we have a strong alignment of interests.”
Key management at the New World division would be offered similar ownership incentives.
Acquisition opportunities
HKBN originally conducted a HK$5.01 billion management buyout in 2012, in which private equity company CVC supported 90 executives including Lai. Then, it debuted to great success on the Hong Kong stock exchange in March 2015, raising HK$5.8 billion through an IPO on March 5 that valued it at HK$9 billion.
The listing provided its 90 original management investors with a 10 times return on their initial HK$180 million combined investment. Meanwhile CVC dropped its 68.4% stake in HKBN to 14.4% in the IPO. “We offered CVC a fourfold return for Hong Kong risk over three years,” said Lai.
The company’s shares have outperformed since the IPO, rising 9.05% to close at HK$9.62 on Wednesday, while the Hang Seng Composite Index has fallen by around 20% over the same period.
Lai next hopes to expand the company further, in a period in which he anticipates there being further broadband consolidation.
“There’s plenty of strategic overlap here [in Hong Kong],” Lai said, noting there are many corporate players offering similar telecom services. According to the Hong Kong government, 25 telecom licencees could offer local fixed carrier services as of November 2015. Of these, Hutchison Global Communications, PCCW-HKT, SmarTone Communications and Wharf T&T were among the largest players in the broadband space.
Further industry consolidation in Hong Kong could even lead to HKBN becoming a target, but Lai smiled at the prospect. “Others may want to, but I’m sure we’re not going to be cheap,” he said.
JP Morgan was the sole financial adviser to HKBN on the acquisition, as well as the arranger of the supporting HK$650 million five-year acquisition loan.
