Rare disappointment for Hutchison tycoon

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Having started in business by hawking plastic flowers, Li Ka-shing must know the difficulties of persuading sceptical customers to pay for products of uncertain value.

But in recent years, the billionaire tycoon had not experienced a defeat as resounding as last week’s failure to list the Italian 3G mobile phone business of Hutchison Whampoa, the Hong Kong conglomerate he controls.

The company’s decision not to float 3 Italia at a valuation of about €7bn (US$8.3bn) – well below the hoped-for €12bn – sets back Hutchison’s plans to recoup some of the €20bn it has invested in 3G.

It also dents Mr Li’s reputation as a shrewd asset-trader, marking a rare refusal by stock market investors to pay the asking price for a business being sold by Asia’s richest man.

More worryingly for Hutchison, the indefinite delay in the initial public offering will continue to focus investors’ attention, and senior management resources, on the loss-making 3G unit, away from other important parts of the ports-to-retail group.

“However one may try to cut it, to have gone as far down the path of regulatory approval as Hutchison has done and then been forced to pull the deal is a major disappointment,” wrote Macquarie analysts in a research note this week.

Hutchison’s executives argue the listing was pulled – and replaced by the private sale of a 10 per cent stake to investors for €420m – due to weak market sentiment in the European telecoms industry.

They point out that share prices in the sector have been under pressure due to fears of rising competition and falling margins.

To make matters worse, in the run-up to the planned IPO by 3 Italia, both France Telecom and Vodafone made bearish statements about the near-term outlook.

However, as the first-ever IPO of a 3G business, Hutchison’s move was supposed to be insulated from, and command a higher valuation than, traditional mobile stocks because of the technology’s ability to offer high-margin video and internet services.

“It is frustrating,” Canning Fok, Mr Li’s right-hand man and Hutchison’s managing director, told the Financial Times. “Our story was not really understood by the market. We are a high-growth company but [investors] seemed to value us like an incumbent”.

Critics of the IPO timing argue that Hutchison, and the scores of banks it hired for the deal, were too hasty in trying to list a business that is barely breaking even, amid signs of a slowdown in new customer numbers.

Mr Fok says that the half a dozen investors lined up by Goldman Sachs to buy into the placement were “smart money” and the market ought to take the €9bn valuation they put on the business as a benchmark.

Many analysts disagree, pointing out that the investors in the placement of 3 Italia would get guarantees and options that were not available to IPO subscribers.

“We believe the market will not be easily convinced to use this placement as a valuation proxy for 3 Italia given the poor sentiment towards the telecom sector,” says Cusson Leung, a Merrill Lynch analyst.

Others warn that, six years after Mr Li embarked on the risky 3G project, Hutchison remains unable to convince investors to buy into its valuation of a business with some 12m customers and estimated revenues of HK$40bn (US5bn) in 10 countries.

“The fact is that the valuation of 3G still requires a leap of faith,” says an Hong Kong-based analyst. “It is a very tough situation for them”.

For shareholders in Hutchison – whose share price is now trading some 15 per cent below estimates of the conglomerate’s net asset value – the delay means the company will not benefit from the expected exceptional profit from the Italian IPO.

Mr Fok says that Hutchison has traditionally been “creative” in finding assets to sell to offset the losses in its 3G business and will do so again this year.

The company still has jewels in its crown, notably a 35 per cent stake in Husky Energy, a Canada-listed oil group whose shares have soared in the past few months.

Hutchison could also sell parts of the Hong Kong port, especially after the heated auction for P&O showed how hungry companies such as Singapore’s PSA, which lost out to Dubai Ports in the battle for the UK group, are for international assets.

As the 3 Italia failure shows, the key to any divestment will be timing and market sentiment but Mr Fok believes Hutchison’s management track record should stand the company in good stead.

“Even when I was disposing of car parks [in Hong Kong] in 1995 for one million dollars each, I always did it at good value and at a good time,” he says.

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