PSA runs 19 ports in 11 countries making it the second-largest global port operator just behind Hutchison Port Holdings, which operates 42 ports in 20 countries and controls some of the most premiere locations in the China market. No wonder, then, that the global partnership is being spun as a deal that demonstrates increasing consolidation in the worldwide ports industry. But is that the whole story?
In a case of masterful media spin, thus far, Hutchison has been able to sidestep too much enquiry into why it needs to sell a stake in one of its best assets.
Hutchison said in a statement that the deal with PSA involved a "sale and purchase agreement to sell 20% effective equity and loan interest" each in Hutchison Port Holdings and Hutchison Ports Investments. Hutchison will maintain control of the port assets, which is key to its leadership position.
Goldman Sachs is advising Hutchison. Morgan Stanley is representing PSA. The deal is expected to close by the end of May.
But if thereÆs more to this story than just ports û though Hutchison is certainly not commenting on this û it is 3G. Hutchison is controlled by AsiaÆs wealthiest businessman Li Ka-shing, who has been paying out steady dividends to his loyal shareholders while 3G continues to drag on the bottom line due to poor consumer take-up of the expensive technology.
Consider that on March 23 Hutchison Whampoa was able to announce net profit of HK$14.34 billion($1.85 billion) for 2005, up from a restated 2004 net profit of HK$12.98 billion. But that 11% gain in full-year net profit was primarily down to one-time gains, such as property revaluations and stronger earnings in its ports and energy operations that offset losses in its 3G unit, which posted a loss before interest and tax of HK$26.88 billion û this was down from HK$38.4 billion the year before. Interestingly, one of the other one-off gains last year was the disposal of stakes in two ports to PSA.
Hutchison had attempted to float its market leader 3 Italia in February, and many analysts hoped the Hong Kong company would then to follow that with a flotation of 3 UK. However, when it became clear that investors were not prepared to accept its valuation of the business at about Ç9 billion ($10.71 billion), the deal was scrapped. Hutchison hoped that the IPO would set a benchmark for the value of its other 3G businesses. It opted instead to sell off 10% of the 3G operator in a Ç420 million private placement.
3G sales more than doubled last year to HK$37.5 billion dollars. And of course, Hutchison forecasts that the 3G unit will break even this year û it says more people will sign up for the service to download movies and games. But meanwhile, ports deals keep the overall balance sheet looking healthy.
In this latest deal, Hutchison Whampoa said it will realise a profit of about HK$24.4 billion from the deal.
So this sale will enable Hutchison to improve its liquidity, reduce net debt, and see a substantial return on investment û all good for its overall bottom line - as well as ensuring a healthy dividend can be paid regardless of 3G. Post transaction, analysts say Hutchison's balance sheet net debt leverage will decline from 38% as at 31 December 2005 to 31%. Leverage is expected to continue to decline to below 30% by the year-end.
But Standard & Poor's Ratings Services reported - just a few hours after the deal was announced on Friday - that its rating on Hutchison Whampoa was not changed by the company's decision to sell the stake to PSA. The agency says: "The outlook remains negative. Although this transaction results in a net debt reduction, which is an important factor in stabilising the rating, improving operating cashflow, in particular from its 3G European operations, is also a key issue under surveillance."
For PSA, which is 100% owned by Temasek Holdings, it's a good deal. In February, it failed to win control of British competitor Peninsula and Oriental Steam Navigation Company (P&O), which would have created the world's biggest port operator. Dubai Ports World offered $6.9 billion.
This sale looks like a fair valuation. Analysts say this deal was done at an acquisition value that equated to 15-16 times EBIT (earnings before interest and tax) for estimated 2006 earnings. Compare that to the P&O-Dubai Ports World deal which using the same formula of acquisition value over EBIT for 2006 was 26 times. To be fair, that was for 100% control, but the upsides of even just a portion of an investment in Hutchison Port are significant.
It gives PSA a lot of scale in one deal, a very strong entry into China, diversification away from Singapore and a clear path for continued growth, says one banker close to the deal.
"This is the biggest investment that PSA has made and it reflects our confidence in these port assets, many of which are in high-volume and high-growth locations," according to a statement by PSA's Chairman Fock Siew Wah. "This investment will generate good long-term value for PSA and allows us to benefit from a well-diversified spread of assets globally."
PSA is expected to finance the purchase through bank loans and possibly a bond issue.
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