HEARD IN ASIA: Hutchison's Global Crossing Stake May Pay Off After Restructuring
By SARAH MCBRIDE
Staff Reporter of THE WALL STREET JOURNAL
HONG KONG -- Hutchison Whampoa Ltd. investors cheered the company's plans to buy a stake in Global Crossing Ltd., a U.S.-listed fiber-optic cable business that is in U.S. bankruptcy proceedings. Hutchison's stock price jumped 4.2% Tuesday to 75 Kong Hong dollars ($9.62) on the news.
Were investors right? Yes -- for now, analysts and fund managers say. Together with Singapore Technologies Telemedia Ltd., Hutchison plans to invest $750 million to take a stake in Global Crossing, which filed Monday in New York for protection under Chapter 11 of the U.S. Bankruptcy Code.
If the deal goes through, it gives Hutchison -- a Hong Kong conglomerate with such interests as ports, telecommunications and property -- the chance to make a tidy profit by selling its stake after restructuring. It also gives Hutchison a powerful new partner in Singapore. The downside: Plenty could go wrong between now and August, which is when bankruptcy court approval is required on any deal.
Just how big a stake the companies will wind up with is unclear, but Hutchison Managing Director Canning Fok said it would be between 70% and 80%. If the stake is 70%, that would add about HK$3 per share to the value of Hutchison's assets, says Patrick Pong, an analyst at South China Research. He reaches that figure by assuming Hutchison would have half the stake, 35% at a cost of HK$2.9 billion. If the stake rises to 80% total -- 40% for Hutchison -- it would add HK$3.60 a share, he says.
In some ways, it is a conservative estimate because Mr. Pong bases his calculations on Global Crossing's September net asset value of $6.9 billion. The company's bankruptcy filings list assets of $22.4 billion and liabilities of $12.4 billion, leaving net assets of $10 billion. Global Crossing paid down much of its debt in the last quarter of the year, accounting for much of the intervening increase in net assets, he says.
Mr. Pong has also assumed Hutchison will have to write off in its entirety a $400 million bond it owns, which is convertible into Global Crossing preferred shares at $45 a share. In fact, Mr. Pong took the very conservative approach of assuming none of Global Crossing's many bondholders would get any of their money back, which would be highly unusual in a restructuring.
Early Stages
"It seems like a reasonable deal," says Henry Lee, a fund manager at Hendale Asia. "But I don't think net-net there's going to be a huge addition to net asset value." Given that the deal is in early stages, and far from a sure thing, he thinks it is too early to decide where the stock price should be.
Hutchison's telecommunications assets lie largely in third-generation mobile-phone licenses in Europe, and mobile-phone services in Asia. Analysts don't see too much synergy with Global Crossing's fiber-optic networks, which are fixed-line.
Unless Hutchison articulates some sort of strategic fit with other parts of the company, analysts say the deal foreshadows a classic Hutchison move: buying an asset, and then selling it as soon as it can get a better price.
In 1999, Hutchison sold its 44.8% stake in mobile-phone company Orange, which it created in 1994 and took public in 1996, for a gain valued $14.6 billion. Last year, it sold its 18.4% stake in VoiceStream Wireless Corp. for a gain of $4 billion. In 1998 and 1999, Hutchison bought the two companies it would then merge into VoiceStream Wireless, with a total investment of around $1 billion.
Another telltale sign this deal may not be for keeps is the fact that Hutchison's stake will likely end up at only 35% to 40%. "Hutchison has always emphasized the importance of majority control [whether] equity or operational," points out Eddie Lau, an analyst at ABN Amro.
Working together with other companies in billionaire Li Ka-shing's Cheung Kong Group, of which Hutchison is a subsidiary, the companies usually manage combined control. In cases where they don't have control, Mr. Lau says, it is often because of regulatory restrictions.
For example, China has rules on how big a stake foreign investors can own in its ports, an area where Hutchison invests heavily. But not every Hutchison observer is sure the increased stake in fiber-optic cable is transient. "The company does sometimes move into new businesses," says Carl Wong, an analyst at HSBC. "They can't just buy the assets today, and hope that another guy will come around tomorrow and buy at a higher price."
Hutchison previously had dipped its toe into fiber optics. It owns 1.4% of Asia Global Crossing, in which Global Crossing holds 59%. Asia Global Crossing and Hutchison together own Hutchison Global Crossing, a privately held Hong Kong company.
'Whole Different Ballgame'
One thing to watch will be how expertly Hutchison and Singapore Technologies Telemedia manage to negotiate with creditors, who need to approve the proposed deal. Last year, Hutchison and Cheung Kong Holdings together bought a 17.54% stake in another ailing company, Priceline. In September they received approval to raise that to 37.5%. But that stake was bought directly from major shareholders.
"It's not like it had to submit proposals to creditors," says Mr. Lau at ABN Amro. "It's a whole different ballgame. In this context, Hutchison doesn't have much of a track record at all."
Another factor to keep an eye on is the link with Singapore Technologies Telemedia.
"They're clearly a very cash-rich group," says Mr. Lee of Hendale. "Hutchison could ... jointly cooperate with them" on other ventures. Potentially, Mr. Lee says, a deal with Global Crossing could pave the way to some sort of link between Hutchison and Hong Kong-based Pacific Century CyberWorks Ltd., with its rich telecommunications assets. PCCW is controlled by Richard Li, Li Ka-shing's son.
Lots of things could still go wrong with this deal. Hidden debt might emerge, or more bidders could jump into the fray. But based on what we know now, Hutchison has done quite well for itself. As Mr. Wong puts it: "The risk is quite sufficiently compensated for by the low price."
Write to Sarah Mcbride at sarah.mcbride@awsj.com1
URL for this article:
online.wsj.com
Hyperlinks in this Article:
(1) mailto:sarah.mcbride@awsj.com
(2) online.wsj.com
(3) online.wsj.com
Updated January 30, 2002 12:01 a.m. EST
Copyright 2002 Dow Jones & Company, Inc. All Rights Reserved
Printing, distribution, and use of this material is governed by your Subscription agreement and Copyright laws.
For information about subscribing go to wsj.com
Used with permission of wsj.com |
