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CSL Sale Sparks Hong Kong Speculation

Robert Clark
News Analysis
Robert Clark
12/20/2013

Telstra has sold its controlling stake in CSL Hong Kong for US$2.43 billion (A$2.73 billion), so concluding a forgettable era of Tier 1 involvement in the South-East Asian mobile sector and sparking speculation about further consolidation in the heavily served market.

Hong Kong CSL Ltd. , a progressive mobile operator with almost 4 million customers, will now return to Richard Li's PCCW-HKT, making it the biggest mobile player in town with 31% of the market. (See VoLTE Hits Hong Kong and CSL Demos LTE-A With ZTE .)

Li unloaded the business to Telstra Corp. Ltd. (ASX: TLS; NZK: TLS) a dozen years ago as he struggled with a major debt pile following his acquisition of the incumbent telco.

Over the years, Telstra paid A$4 billion in total for CSL. However, the $2.43 billion settlement price for its remaining 76% stake, announced Friday morning, is at a A$600 million premium to the asset's marked-down book value.

CSL, which owns Hong Kong's premium mobile brand 1010 and the largest slice of the corporate market, has delivered CAGR of 9.4% during the past three years, according to Telstra numbers.

But as Telstra's only offshore mobile asset, it is redundant to its global strategy, which focuses on enterprise cloud and managed services.

Its exit reprises the departures of companies such as BT Group plc (NYSE: BT; London: BTA), AT&T Inc. (NYSE: T), and Vodafone Group plc (NYSE: VOD), which all made half-hearted forays into the Asian mobile market in the late 1990s and early 2000s, but were forced out either for financial reasons following the telecom bubble or because of poor market performance.

Telstra CEO David Thodey said that "a number of dynamics" in Hong Kong meant that now was "the right opportunity for Telstra to maximize our return."

One of those dynamics is market saturation: Hong Kong has nearly 17 million mobile connections but only 7.2 million inhabitants. Another is politics. Telstra is without doubt the last non-Chinese operator to control a Hong Kong telco.

Local operators suspect that the regulator's plan to take back a third of the 3G spectrum in the 1.9-2.2GHz band is aimed at giving China Mobile Hong Kong Co. (which currently leases 3G from CSL) a full seat at the table. (See Spectrum Strife in Hong Kong.)

CSL and all other operators -- except China Mobile -- banded together to oppose the idea, unsuccessfully as it turned out. Ofca last week directed the operators to surrender a third of their 3G spectrum by 2016 so it can be re-auctioned.

Seen in that light, HKT's offer to surrender all of its 3G spectrum in 2016 -- its own 2x15MHz as well as that of CSL, and not to bid for them in the auction -- is even more surprising. HKT says it can do that because it now has access to sub-1GHz frequencies, including 850MHz and 900MHz, as well as 1.8GHz, 2.1GHz and 2.6GHz. Additionally, it will no longer have to pay annual usage spectrum fees.

"After returning the 3G spectrum, [HKT/CSL]… would benefit from respective leasing and renewal costs savings, and at the same time continue to possess adequate spectrum resources and provide undisrupted operations," it said in its statement.

The beneficiaries of this act of seasonal goodwill will be HKT's rivals, which can expect to pay a discount for the frequencies when they go on the sale in two years.

On Friday, those operators enjoyed a bounce in stock price as investors eyed further market consolidation. SmarTone Telecommunications Holdings Ltd. (Hong Kong: 0315), currently the third-largest player behind Hutchison Telecommunications (Hong Kong) Ltd. and CSL/HKT, is seen as the obvious target for China Mobile. Its stock on the HKSE rose 18.6% to HK$8.81.

PCCW-HKT said it is funding the acquisition through a $2.5 billion loan from Standard Chartered Bank. Ofca has the power to reject or amend the deal if it considers it anti-competitive.

— Robert Clark, contributing editor, special to Light Reading

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Ray@LR
[email protected]
12/20/2013 | 1:02:26 PM
Who is controlling the Hong Kong market I wonder?
This looks like a bit of a stitch-up.... I wonder what the markey dynamic will be in a year's time and what the operators are saying behind closed doors? 
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