Market Insight

Hutchison sells Hong Kong landline business to private equity co. iSquared

August 01, 2017

Seth Wallis-Jones Seth Wallis-Jones Principal Research Analyst, Service Providers & Platforms
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Hutchison Telecommunications Hong Kong Holdings (HKTH) Limited has agreed to sell the landline business of Hutchison Global Communications (HGC) to Asia Cube Global Communications, a subsidiary of infrastructure investment business iSquared Capital for HK$14.5 billion ($1.86 billion).

  • After receiving several expressions of interest, Hutchison received an attractive offer with iSquared beating an offer from a consortium including TPG and MBK partners and Hutchison has felt compelled to realise shareholder value
  • Strategic questions remain around missing out on potential synergies and convergence opportunities between the fixed and mobile businesses
  • Hutchison will instead focus on the mobile business, leveraging international scale as their competitive differentiation

Hutchison Telecommunications Hong Kong Holdings (HKTH) Limited has agreed to sell its’ landline business, Hutchison Global Communications (HGC) to Asia Cube Global Communications, a subsidiary of Infrastructure investment business I Squared Capital for HK$14.5 billion ($1.86 billion). The deal is subject to approval by shareholders, but with Li Ka Shing’s CKH Holdings controlling 66.09% of issued shares and undertaking to approve the deal that will not cause any issues. HGC operates Hong Kong’s largest fixed line network which includes a residential fibre network passing some 1.8 million of Hong Kong’s 2.5 million residences, 6,000 kilometres of ducting and 1.4 million kilometres of fibre, two data centres, and a WiFi network with 25,000 hotspots - many of which are backhauled with 1Gbps fibre.

The HGC Group stated a net asset value of HK$3.58 billion as of December 2016 and generated profits before tax of HK$478 million (HK$401 million after tax) in 2016. The deal is expected to realise a profit of HK$5.75 billion.

The fixed line business serves some 320,000 subscriptions – only around 9% of the broadband market. Subscription growth of around 3.0% y/y in 2016 compares to overall market growth of 2.5%. The business largely generates revenues from the non-residential market with the group reporting for the first half of 2017 that 51% of revenues derive from the international and local carrier market, 32% from the business and corporate segment, 5% from the data centre business leaving 12% of fixed line revenues to come from the residential segment. While the business segment saw growth of 8% y/y in H1, the residential segment saw some competitive pricing pressure on broadband revenues over the last year, falling 4.6% y/y to HK$250 million for H1. 

 

Our Analysis

iSquared gains Asian telecoms infrastructure

Hutchison Group has taken up an attractively priced offer from infrastructure focussed private equity fund iSquared for the fixed line assets following several bids. Prior investments by iSquared have focussed on the energy sector with acquisitions reported in India, The United States, The United Kingdom and Ireland. The company has also invested in Chinese waste water treatment and Indian toll roads. While the CEO of HGC speculated that iSquared may be able to develop synergies with its other international assets, in particular leveraging the four international routes into China, this looks unlikely to be a direct opportunity with the portfolio of iSquared investments that has been reported.

However, in the Hong Kong market the HGC fixed line business will be well positioned through the existing WiFi network infrastructure to service previously competing mobile operators seeking an increasingly capillarised network infrastructure suited to providing high-band 5G services. With four land routes into the Chinese mainland, iSquared may also view this as the start of a broader international network. 

Convergence strategy clouded

HGC HK will remain a key supplier of fixed line services to the mobile business with a five year master services agreement already in place and co-operation between the two entities expected to continue past that date. However beyond unlocking cash through the sale, the strategic advantages for Hutchison’s 3 mobile business is less clear. The two units have operated at arms-length, but with networks and services converging synergies can increasingly be tapped between fixed and mobile operations infrastructure and services.

While Hutchison Telecommunications CEO Cliff Woo noted that the two business have operated separately, 3 will lose some measure of access and control over the infrastructure investments made by the fixed line business which it implicitly retained as part of the group led by Li Ka Shing. The opening up of the WiFi network and future 5G small cell backhaul infrastructure to competitors (a core way in which iSquared can unlock additional value) will reduce network driven competitive advantages.

Cash creates options

CEO Woo notes that 3 views its core competitive advantage within Hong Kong as lying not in the local network but in its significant international businesses offering scale of operations against mainly local competition. While options have not been fully explored, Hutchison - 3 may use the cash to help fund acquisitions. Within the Hong Kong market that may be difficult to get past a regulator which had been originally opposed to the reduction from five to four mobile operators brought about by the acquisition of CSL by PCCW, but Hutchison’s Woo notes that it may look for opportunities to expand through acquisitions within the region. Further afield, Hutchison bought out Tele2’s Austrian Business focussed MVNO for €95 million just last week, as part of a strategy that appears to be moving towards a focus on the business and enterprise markets. Alternatively debts may be paid down, investments made in the next round of mobile network upgrades and cash returned to shareholders.

 

Geography
Asia Hong Kong
Research by Market
Mobile & Telecom
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