Here, Here, Come to Papa, Richie Boy! (8)
Feb 23, 2001 - 13:52:00 HKT
QuamResearch
The half-truth strikes again! Li Ka-Shing's Hutch (13) now owns 0.8% of the boy's failing and pressured PCCW. Of course, the transaction does somewhat cheapen the old man's credibility. Here is what KS Li said a month ago:
"It is almost impossible for Hutchison Whampoa to buy a stake in Cyberworks."
As we noted in a previous article ("Kid's Gotta Learn") written after father and son were seen eating together, causing massive speculation and a jump in the ailing stock price of PCCW, KS Li's statement was so ambiguous that eventual involvement should not come as a complete surprise.
At the time, we asked several questions: is it "almost impossible" for another Li Ka-Shing vehicle to buy a stake in Cyberworks? is it "almost impossible" for Li Ka-Shing himself to perhaps buy up a position? exactly how impossible is "almost" impossible, anyway? We concluded that with regards to the major issue facing PCCW -- C&W's stake in PCCW, one which they want to dump quickly -- KS Li would probably not be stepping in.
However, this latest development suggests that KS Li is trying to help out in a more indirect way ... by lending his own name to PCCW and thus suggesting that investors don't have to trust totally in Richard's ability.
Further below, you will read what else he is lending to PCCW.
The Facts of the Matter: What's Being Traded and For How Much
The deal is this: PCCW gets Hutchison's satellite business, Hutchison Telecommunications Technology Investments Ltd. (HTTIL), and Hutch gets 0.83% of PCCW.
The official announcement didn't quite put it that way, instead describing it as a purchase of HTTIL, but when no money changes hands, such a transaction is a horse trade, and the two parties are not buyer and seller but partners.
Thus despite Canning Fok's saying the transaction simply represented Hutch's exit from the satellite business -- the business of HTTIL -- to focus on its telecom efforts on mobile telecommunications, investors know that it really represents a small business link-up between father and son.
Officially, the company said this:
The Company has entered into the Sale and Purchase Agreement with Hutchison Telecom ... to acquire all the issued share capital of HTTIL and the Shareholder's Loan from Hutchison Telecom for a total consideration of HK$803.4 million. The consideration will be satisfied in full by the issuance and allotment of Consideration Shares ... at the price of HK$4.375 per Share.
The consideration of HK$803.4 million at $4.375 per share means 183,634,285 new shares. The exact number was left out of the PCCW announcement but included in the Hutch announcement. Those 183.6 million shares represent about 0.84% of the existing share capital and 0.83% of enlarged share capital. There is a lock-up period of one year from the date of completion of the transaction, expected to be no later than March 11.
Note that the share price is the same as yesterday's close, but it is also at 6% discount to the 20 days leading up to the announcement. Either Richard and his father decided on this very quickly yesterday, or they've been discussing it a while and even KS Li didn't want to "pay" too much for the stake.
A Few Observations
HTTIL makes money. That PCCW gets this business means it is very starved for cash.
HK$ Mil
12/31/00
12/31/99
Pre-tax*
$14.15
($16.1)
After-tax
$13.97
($16.3)
*excl. extraordinary items
However, these figures are very small. Why should PCCW be interested in such a small business? On the other hand, why would Hutch sell it for potentially worthless PCCW shares when HTTIL has just turned profitable?
The key is in one little figure that is not exactly buried in either of the PCCW or Hutch announcements, but neither is it loudly proclaimed. And there is another question about this figure that may or may not be important. Read the announcement one more time:
The Company has conditionally agreed to acquire all the issued share capital of HTTIL and the Shareholder's Loan from Hutchison Telecom for a total consideration of HK$803.4 million. (emphasis ours)
Further down in the announcement is a description of the shareholder's loan: as of February 22, yesterday, the "total amount of loans or advances outstanding and owing ... from the HTTIL Group to Hutchison Telecom ... amounts to ... HK$546 million."
Call it a cheap loan from papa to junior.
Perhaps the loan was outstanding for quite a while. However, investors simply don't know and are not going to find out. For that reason, one should be cynical and figure that that is the real reason for the deal. KS Li can indirectly lend his son over half a billion dollars by trading a $300-million-plus-turnover communications company with rather limited scope (some 200 corporate customers) for some shares. And lest one forget, a 1% stake is not exactly immaterial.
What HTTIL Does
We've left this until virtually last, because the business probably matters less than the dollar loan and the psychological impact of having KS Li financially associated to PCCW.
HTTIL provides "satellite-based telecommunications solutions, principally based on VSAT technology ... (where) VSAT refers to two-way satellite transmission via small satellite dishes and similar apparatuses."
An important thing to note here is that HTTIL is NOT a satellite company. It provides services based on satellite communications, and "leases multiple transponders from regional and global satellite operators."
The announcement goes on to describe the business:
The ... solutions offered ... include quality voice, fax, server-to-server connectivity, video and multimedia services, public voice and Internet connectivity. The HTTIL Group first started out as a provider of point-to-point private communications link for corporates and multinationals in the region, employing VSAT technology. It has ... expanded into IP applications and other data network solutions. Currently, ... HTTIL ... has operations in over 40 countries, and through its extensive partnership arrangements with 150 partners in the Asia Pacific, the Middle East and Europe, it can deliver complete communications solutions across these markets. The HTTIL Group is a leading satellite-based network service provider in the Asia Pacific region.
The Dirty Little History of HTTIL
HTTIL started off as a Richard Li company back in 1994 and was known as "Pacific Century Technology Investments." One might remember that Richard Li started his Star TV back in 1991 -- with papa's help, i.e., money -- and then sold a large part of that -- 64% -- off to Rupert Murdock's News Corp. in 1993. Thus it was after partially getting out of Star that he started his second company, yet he was apparently not very successful at it either.
The next year, in 1995, the same year in which he sold the remaining 36.4% of Star to Murdock, Richard sold the failing company to Hutchison US$74.5 million (HK$579.6 million). There seems to be several patterns established there: 1) losing money and selling out; 2) father helping out. This second point is rather critical. The HK iMail reported that KS Li gave US$400 million (HK$3.11 billion) to start PCCW.
Actually, we are not sure how unsuccessful Richard was with the original HTTIL as no numbers were provided, but considering the entrance of Hutch just one year after Richard Li started the thing, combined with the huge gift given later by KS Li to his son to start of PCCW, we can guess that Richard's business skills even then were somewhat shaky.
Buy, Sell, or Hold
With an extra half billion dollars via his father's indirect loan, PCCW has secured a little extra credit and can pay a bit more of his other debt. One can assume that Hutch will be a softer and nicer creditor than the banks. Also, the extra half billion will offset some of the expected downturn in HKT's profit, which is likely to come in at a level less than half that of last year, if the internal documents leaked by the Economic Times earlier this month turn out to be accurate. A cynic might even ponder whether PCCW's wonder-accountants will be able somehow to book this loan as a profit! This may be a challenge, but Li's team of CPAs has pushed the accounting edge before.
At $4.375 and with share capital expanding from 21.88 billion to 22.06 billion, PCCW's market cap is HK$96.5 billion. Investors may think this is cheap because of the HKT assets, but HKT is losing ground and losing profitability while at the same time financing a portfolio of Richard's losing businesses. In addition, C&W anxiously waiting to dump what shares it can -- something that will be amplified in six months once the lockup period for its last remaining stake expires.
The only hope is if KS Li truly does step in, indirectly through management and business help or directly via buying the company, much the way he did with HTTIL back in 1995. That could be a challenge even for KS Li, though, as the control he would thus have over the territory would be too complete, and HK's weak and passive legislature would finally surely stand up to that.
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