Hutchison makes $545 million offer to take HTIL private

Hutchison Whampoa on Friday made an offer for the 39.6% of Hutchison Telecommunications International Ltd (HTIL) that it doesn't already own, with the aim of making the mobile company a wholly owned subsidiary. Hutchison offered HK$2.20 in cash for each share, or the US dollar equivalent of HK$33 per American depositary share, which values the total offer at HK$4.23 billion ($545 million), assuming all outstanding share options are exercised by the record date.

The proposed privatisation and delisting comes after HTIL, which is listed both in Hong Kong and New York, sold its controlling stake in India's third largest mobile operator, Hutchison Essar, to Vodafone in 2007 and its controlling stake in Israel's Partner Communications in October last year. In May 2009 the company also spun off its mobile businesses in Hong Kong and Macau for a separate listing on the Hong Kong exchange, which left the company with no cash-generating businesses at all. The four remaining mobile businesses, in Indonesia, Sri Lanka, Vietnam and Thailand, all still generate negative cash flow and none is in the top-three in its country.

The business in Thailand has been up for sale for the past couple of years and HTIL is in discussions with its government-owned local partner about a buyout, suggesting that soon there may only be three businesses left.

In a statement, Hutchison said that while it remains confident of the future prospects for HTIL's growth businesses and will continue to invest in them to build scale, it is of the view that "in the short and medium terms HTIL faces potential uncertain financial performance with the associated risk of significant share price volatility, thus making it less suited to remain a publically listed entity." As the remaining businesses, particularly in Indonesia and Vietnam, will continue to need significant capital to broaden and expand their operations, there will be no surplus cash left for dividends.

Also, the sale of assets have resulted in a sharp drop in HTIL's market capitalisation from a high of HK$95.6 billion in January 2007 to HK$7.9 billion today, which means that the liquidity and trading activity in the stock have greatly declined. The stock underperformed the Hang Seng Index by 27.5% in the second half of 2009. The share price gained 28.5% on Friday after the offer price was revealed, to a close of HK$2.12.

"They have cash in the business which they can continue to invest in these three growth businesses (Indonesia, Sri Lanka and Vietnam), but the public investors are not necessarily going to be happy with Ebitda losses for the next couple of years. Eventually they will turn around, but it will be a while before they turn around," noted one source. "If this was a new business it would not be listed," he added.

The arguments for a privatisation and delisting are very similar to those outlined by Ananda Krishnan-controlled Binariang as it took its Malaysian mobile operator Maxis Communications private in 2007. Maxis was relisted via a $3.3 billion initial public offering in November last year after a restructuring that left the international business in India and Indonesia, which is still in the need of large cash infusions, outside the new vehicle. Hutchison has taken a slightly different approach since it spun off the cash-generating Hong Kong and Macau operations before the privatisation, but the final outcome will be largely the same as that achieved by Maxis. However, as Hutchison Telecommunications Hong Kong Holdings was listed through an introduction and didn't sell any new shares, investors who weren't already shareholders of HTIL have so far had limited access to those shares.

The deal, which is expected to take three to four months to complete, will be another test for the Hong Kong market, where other companies have had difficulties in getting shareholders approval for their proposed privatisations in recent years. The latest deal to falter was the proposed privatisation of PCCW by its controlling shareholders last year, although that deal was scuppered by a Hong Kong court rather than the shareholders after the regulators argued that the company's owners had attempted to tilt the shareholders' vote in their favour.

In January 2006, shareholders of Henderson Investment voted no for a second time to a proposal by parent company Henderson Land Development to take the company private.

And thanks to HTIL's shareholding structure, it won't take much for this deal to get voted down either, should the minority shareholders have a more positive view on the share price than that reflected in Hutchison's offer.

The privatisation will be completed through a scheme of arrangement, which means that 75% of the independent minority shareholders must vote yes to the deal for it to go through, and not more than 10% of the same independent shareholder can vote no. In the case of HTIL, excluding Hutchison's 60.4% stake and other parties acting in concert, independent shareholders make up about 33% of the share capital, which means shareholders who control only 3.3% of HTIL's share capital can make the deal fail, should they wish to do so.

Depending on how the share price trades between now and the record date, this could become a real option. However, analysts noted on Friday that the offer price seemed fair, which should increase the chances that none of the shareholders will attempt to block the deal. Hutchison has made clear that it won't increase the offer price.

The HK$2.20 on offer represented a 33.3% premium over the last trading price of HK$1.65 before the stock was suspended on Monday last week and a 37% premium over the close of HK$1.61 on December 31, the last full trading day before HTIL announced (after the suspension) last Monday that it had been approached by Hutchison about a general offer for its shares.

HTIL was listed at a price of HK$6.07 in 2004. Since then, the size and shape of the company has changed significantly however, and since 2007 shareholders have received a combined HK$13.75 per share through special dividends following the sale of the Indian assets, as well as a stake in Hutchison Telecom Hong Kong in connection with its listing last year. In the announcement, Hutchison noted that since the IPO, HTIL has generated total returns (including dividends and the spinoff of the Hong Kong and Macau business) of 178% to its shareholders, translating into an annualised return of 22% per year through December 2009.

And if you take out the $4.2 billion, or HK$0.87 per share, of cash that HTIL is sitting on, which Hutchison is obviously not paying a premium for, then the premium on the rest of the assets is above 80% versus the December 31 close.

However, it is hard to believe that Hutchison, which is controlled by Li Ka-shing, Hong Kong's richest and probably savviest business tycoon, would make the privatisation offer if it didn't also feel that the business was undervalued. Indeed, the company's strategy has always been to buy (or invest) low and sell high - a philosophy it has repeated again and again through the years, seemingly without much emotional attachment to any particular business.

And the mobile phone businesses now grouped within HTIL are no different. According to the same source mentioned earlier, "the strategy is to invest in these businesses early and grow them. And once somebody offers them exceptional value for them, they'll sell."

Hutchison is being advised by Goldman Sachs, which continues to capitalise on its great relationship with Li Ka-shing. Last year, Goldman advised both on the sale of Partner Communications and on the merger of Hutchison's telecom operations in Australia with Vodafone's Australian business. The US investment bank also helped arrange the listing of Hutchison Telecom Hong Kong.

According to the announcement, a scheme document, including the expected timetable, will be dispatched to HTIL shareholders as soon as practicable.