At an analyst briefing today, executives provided an update on HTIL's strategy now that it has disposed of its largest asset, Hutchison Essar , to Vodafone Group plc (NYSE: VOD) in what was described as "simply an offer we couldn't refuse." (See Vodafone Wins Battle to Buy Essar.) Pending a shareholder vote on March 9 and the approval of India's Foreign Investment Promotion Board, the deal could close as early as April 2.
HTIL CEO Dennis Lui said that essentially the company's "strategy has not changed," in that it will continue to look for opportunities to invest in emerging markets where there are prospects for "excellent cash generation."
But with a pre-tax gain of $9.6 billion from the sale, Hutchison Telecom is taking the opportunity to ramp up its investment and acquisition plans. Lui noted "prices for telecom businesses [in emerging markets] are expensive," but he expects there to be "a cooling time within the next 12 to 24 months." HTIL plans to take that opportunity to buy up some more assets to add to its 8 remaining mobile operators -- either in new markets, or in countries where it's already present.
Tim Pennington, Hutchison Telecom's CFO, provided a breakdown of how the company will spend its newfound riches:
- 50 percent of the surplus cash ($4.1 billion) will go to shareholders in a special dividend announced today of HK$6.75 per share. (See Hutch Plans Dividend.)
- $670 million will be used to pay off outstanding debt in Hong Kong.
- $1.1 billion will pay off the debt of its operations in Thailand.
- Including the company's existing cash, it will end up with $5 billion to invest in expansion.
"We believe that will leave us well positioned to take advantage of future opportunities," Pennington said. But, he added, "such opportunities come with a need for discipline. Over the coming weeks we will lay out strict investment criteria." If the company has not invested the money by the end of 2008, it will consider paying out another special dividend.
As for where HTIL might acquire new operations, Pennington said: "I don't think we have pre-conceived ideas of where that is; probably not Latin America -- we've been there and exited." Although, Lui interjected, "Who knew we'd exit India?"
As the emerging markets arm of Hutchison Whampoa Ltd. (Hong Kong: 0013; Pink Sheets: HUWHY), HTIL has a non-compete clause with its parent company, which rules out forays into Europe, North America, and Australia. There's also a three-year non-complete clause in the Vodafone deal.
Hutchison Telecom has already decided to spend $1.1 billion to expand its businesses in the high-growth markets of Indonesia, Vietnam, and Sri Lanka. The company launched HT Mobile in Vietnam in January, while the operator in Indonesia is set to go live by the end of March. (See Hutch Launches in Vietnam.) Lui said the company "might engage with more suppliers" to accelerate its network expansion in those countries, adding: "This includes Sri Lanka where we are behind in coverage." HTIL has a $450 million vendor financing deal with Siemens in Indonesia, which will take it through 2008, but no agreements in Vietnam.
Executives emphasized that the company has no plans to sell any of those units, and that it accepted the Hutchison Essar deal because it would have been hard pressed to achieve incremental growth much above what Vodafone was offering. "We've taken the bold decision that if the offer is greater than the strategic value [of the business] we will put it to our shareholders," Pennington boasted. "We have not had any offers on the remaining businesses that we would even consider at this time."
HTIL's share price closed HK$0.44 (2.56%) higher at HK$17.64 today, before news of the special dividend was released. It had fallen by 8 percent since the Vodafone deal was announced, on concerns about the company's financial performance without Hutchison Essar.
Pennington acknowledged that Hutchison Essar accounted for around 50 percent of the company's revenues, but maintained that the eight other operations, particularly in Israel and Hong Kong, are experiencing strong growth. The company estimates EBITDA for its remaining businesses in 2006 will be $650 million.
According to a statement filed with the Hong Kong stock exchange Wednesday, Hutchison Telecom's operating profit for the first nine months of 2006 was HK$3.56 billion, of which HK$2.61 billion came from Hutchison Essar.
— Nicole Willing, Reporter, Light Reading