HKBN is again a PE firm takeover target

Small listed Hong Kong operator HKBN is once again a private equity (PE) takeover target. This time the suitor is I Squared Capital, owner of rival HGC Global Communications, HKBN confirmed in a stock exchange filing Thursday.

Trading in HKBN stock was suspended Tuesday afternoon after it spiked 13% on news of the potential merger. It rose 0.54% to $5.62 Hong Kong dollars (US$0.72) Thursday after trading resumed. HKBN said it would go ahead with talks with I Squared although it had not yet formed a view on the transaction.

Last May HKBN received bids from three PE firms – KKR, Stonepeak and PAG. At that time its stock was HK$9.91 ($1.26), valuing the firm at around HK$13 billion ($1.7 billion).

Figure 1: HKBN might soon be acquired by its rival HGC's owner.
(Source: HKBN)

But the deal collapsed because of concern about the valuation and volatility of the stock, Bloomberg reported. Since then, HKBN's share price has fallen 44%, valuing the company today at around HK$7.4 billion ($940 million).

For I Squared, HKBN is not only much more attractively-priced but is also a natural fit with HGC, with both firms offering fixed-line broadband and enterprise services.

Over-supplied with fixed-line

A merger would also further rationalize Hong Kong's over-supplied fixed-line services market – a legacy of the late 1990s and 2000s, when five fiber networks and a cable network were rolled out. HKBN itself has driven some of the consolidation, acquiring two former telco competitors as well as local IT services firms.

These days it derives more than half of its revenue from its enterprise business in Hong Kong and mainland China. It is Hong Kong's second largest home broadband player, with 897,000 customers, along with 241,000 mobile virtual network operator (MVNO) customers. Its fiber network passes 2.51 million homes, around 94% of the total.

Last financial year the company reported revenue of HK$11.6 billion ($1.48 billion) with earnings before interest, taxes, depreciation and amortization (EBITDA) of HK$2.6 billion ($330 million) on a 34% margin.

HGC was founded in 1995 as Hutchison Telecom's fixed-line arm. It was sold to I Squared for HK$14.5 billion (paywall applies) in 2017 and today offers fixed-line broadband, enterprise and data center services.

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— Robert Clark, Contributing Editor, special to Light Reading