FEER(3/21) Li Ka-shing's Global Crossing Bid Could Aid Econ
By BRUCE GILLEY IN HONG KONG
WHEN PEOPLE look back on Asia's recovery from world recession, they may say the turning point was the proposed $750 million takeover of United States-based telecoms-infrastructure company Global Crossing by Hong Kong tycoon Li Ka-shing in alliance with well-connected state company Singapore Technologies.
That, at least, is the hope of many in Asia's financial and business community who are eagerly watching the outcome of the battle for Global Crossing, the one-time toast of the global tech boom which filed for bankruptcy protection in January.
Ever since the dotcom disaster began in early 2000, followed quickly by a U.S.-led recession, Asia's economies have been in the doldrums and deal-seeking investment bankers in the region have been similarly becalmed. The winds have disappeared in every sector but nowhere more so than in telecoms and hi-tech, where many companies have share prices only a tenth of their all-time highs. Analysts say that's exactly why signs of renewed interest in the telecoms sector may foreshadow a wider regional recovery.
A few companies have already ventured onto the deserted streets to pick up the wreckage of the hi-tech and telecoms boom. In December, Reach, the joint venture between Australia's Telstra and Hong Kong's Pacific Century CyberWorks, took over the Asian assets of submarine-cable-provider Level3 for $80 million (a sixth of the book value), more than doubling capacity at a stroke. Given the size and scope of Global Crossing, a successful takeover by the Hong Kong-Singapore alliance would boost confidence in the region, analysts say.
"We are at the bottom now and although recovery may be a few years away, these companies need to take the opportunities when they come," says Richard Ferguson, telecoms analyst at brokerage Nomura International in Hong Kong. As the REVIEW went to press, Global Crossing remained in play among the competing claims of shareholders, creditors, rival bidders and even national-security concerns raised in the U.S. Congress. Those forces could yet conspire to send the company into liquidation.
Whatever the outcome, the show of interest in the mesh of submarine cables and landing sites owned by Global Crossing in 27 countries is being seen as the early signs of spring in the world's, and especially Asia's, struggling economies. Those hopes are hugely bolstered by the involvement of Li, whose Hong Kong-based Hutchison Whampoa has a knack for buying assets on the cheap just as markets are turning upward.
"Hutchison has had good timing in the past and the price they're offering is cheap," says Stephan Beckert, analyst with telecoms newsletter Telegeography in New York. "Getting the transaction closed and approved rapidly will be essential to making it a success."
Global Crossing was founded in 1997 and listed the following year to build a worldwide undersea fibre-optic cable network for phone calls and Internet data. By the end of last year, it owned 150,000 kilometres of undersea cable, accounting for a fifth of all capacity connecting the U.S. with the rest of the world. Its 59%-owned Asian unit, Asian Global Crossing, listed in 2000, owns 40,000 kilometres of cable within Asia and across the Pacific.
But the expansion of rival systems resulted in a glut of capacity and a collapse of prices worldwide. Creditor groups are now owed more than $12 billion in a company with a market value of just $450 million, a mere 1% of its peak value.
For Li Ka-shing, the bid for Global Crossing is a case of trying to turn a bad investment into a good one. Hutchison lent $400 million to the company in early 2000, just before the global tech collapse, a reminder that even Li is not infallible. It also invested $50 million in the Asian subsidiary (before selling down from 11% to 1% months later) and has a half share in its Hong Kong landing infrastructure and support centres.
Winning control of the entire operation would represent for Li an attempt to turn a small investment that went sour into a bigger investment that pays off handsomely. "We see how the Global Crossing assets would benefit from a world recovery," says Laura Cheung, spokeswoman for Hutchison Whampoa. "The U.S. seems to be on that route now. If so, then all sectors would become healthier."
Cheung declines to comment on how long Hutchison would hang on to Global Crossing. "It depends how you define short-term or long-term," she says. But many analysts believe it would keep the company long enough to create Hong Kong's dominant fixed-line telecoms player. Hutchison's 800-kilometre fixed-line network in Hong Kong was injected into the joint venture with Asia Global Crossing. With international connections, Hutchison would be well placed to overtake the incumbent, the former Hongkong Telecom business now owned by Li's son Richard's Pacific Century CyberWorks.
"I think you can see here the outlines of a situation where PCCW exits the telecoms sector for the next big thing, leaving it to Richard's father," says one equity analyst in Hong Kong, speaking on condition of anonymity. Hutchison's Cheung declined to comment.
Hutchison's partner for the bid, Singapore Technologies Telemedia (STT), was, like it, the local partner and an initial investor in Asia Global Crossing. Indeed, the bid may be more important to the Singapore company. It was STT that first approached Global Crossing about a takeover in the middle of last year, to be joined by Hutchison later in the year, Global Crossing chief executive John Legere told Dow Jones Newswires on March 10.
Founded in 1989, Singapore Technologies is enmeshed in the close family, party and personal relationships of the Singapore elite. It was built by its current deputy chairman, Ho Ching, daughter-in-law of Singapore Senior Minister Lee Kuan Yew -- her husband is Deputy Prime Minister Lee Hsien Loong. STT was launched in 1994 as part of a government -- orchestrated move to introduce more competition into the country's telecoms sector and is chaired by a top bureaucrat. It includes former government and military leaders on its board. Ho Ching chairs STT unit StarHub.
Like Hutchison, STT is hoping the purchase of its own international cable connections will help it in the battle against the local fixed-line incumbent, in this case another state-owned firm, Singapore Telecommunications. SingTel is building its own pan-Asian undersea -- cable network at a cost of $1.2 billion, a fact that has many in the city-state commenting that it would be better off launching a counter-bid for Global Crossing, something it has consistently ruled out. SingTel's main fear is that STT will become a well-rounded telecoms company that can list on stockmarkets in Singapore and the U.S., drawing institutional funds away from the must-buy SingTel.
For both Hutchison and STT, the devil is in the details. Under the deal, Hutchison would write off its $400 million loan and invest new cash of $375 million in Global Crossing, effectively doubling its investment. STT would also invest $375 million. The two would end up with a 79% stake.
On the surface it's a sweet deal. Banks owed $8 billion in long-term debt would end up with a mere 21% stake in the company, an estimated 10 cents on the dollar. The low price on offer, which Hutchison says it will not change, means there is a danger of losing out to rival bids, or to having the whole thing rejected by creditors and shareholders. Global Crossing says that more than 40 companies have signed confidentiality agreements to look over the company's books in order to prepare rival bids before an April 23 deadline.
Even if Hutchison gains control, it will be a hard slog. The global glut of cable capacity is expected to persist for another year or two. In Asia alone, according to Nomura, undersea-cable capacity will increase by two-and-a-half times from 2001-02, a figure that can always be upgraded severalfold with a little extra investment. With prices falling by 50% a year, operators have to sell twice as much just to keep revenues even.
"I don't know that they'll have an easy time turning a profit under the current market conditions," says telecoms analyst Beckert. Still, demand worldwide is doubling every year and the current glut is expected to become a global crunch by around 2004 or 2005.
If the Hutchison-STT alliance could nurse the company back to health, it would be a prime asset for disposal. They would have eight of 10 seats on the Global Crossing board, leaving Hutchison with a less-than-majority stake -- usually a signal it's not in for the long haul. The company's telecoms assets are mostly in mobile-phone services in Europe and Asia.
Even if Li loses Global Crossing, it will have an important impact on Asia. The fact that Li is seeking to buy distressed assets in Asia's telecoms sector is being taken as a sign of recovery around 2003 or 2004, according to Nomura's Ferguson. This is already prompting a lot of jockeying for assets in the region.
In addition, the bid is a glimpse into how competition is likely to heat up between incumbents and new telecoms operators in both Hong Kong and Singapore during the next boom. The mere fact of a joint Hong Kong-Singapore bid in the telecoms sector is new, suggesting that the reputed rivals may work better as partners. Hutchison and STT compete in the paging market in Singapore but have moved on from competing in a dying industry to partnering in a growing one.
A successful bid by Li would start a scramble for buying and prefigure regional recovery. Even if he loses, the bid is setting antennae twitching and reveals much about how the telecoms sector may look in the coming years. At worst, Li will walk away with a $20-million cancellation fee from Global Crossing for his pains.
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Updated March 13, 2002 5:15 p.m. EST
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