Spin-off king keeps them guessing

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Hong Kong tycoon Li Ka-shing has a habit of spinning off bits of his Hutchison Whampoa empire.

Between the start of 2004 and the end of 2006 the conglomerate announced gains from disposals and spin-offs totalling $8.8bn, helping to offset losses from its $25bn investment in mainly European 3G phone networks.

The largest of these disposals – last year’s $4.4bn sale of a 20 per cent stake in its global ports business to rival Port of Singapore Authority – yielded an exceptional gain of $3.1bn.

But the $11.1bn sale by Hutchison Telecommunications International (HTIL), the group’s developing markets mobile provider, of its 67 per cent holding in Hutchison Essar to Vodafone breaks the mould in more ways than one.

HTIL said it expected to book a pre-tax gain of $9.6bn from the sale of its stake in India’s fourth-largest mobile phone operator, singling out the deal in terms of scale.

Another important difference is that the gains have accrued to HTIL rather than Hutchison directly. The question being asked by investors is when HTIL will disperse the proceeds to its parent and minority shareholders.

HTIL has so far said only that its options include using the windfall to reduce debt, to reinvest, or to distribute to shareholders through a special dividend, with details to be announced by company management after this weekend’s Chinese new year holiday.

With a 49 per cent stake in the Hong Kong-listed HTIL, Hutchison Whampoa would be entitled to half of any pay-out.

Investors said they were pleased with the price paid by Vodafone, which gives Hutchison Essar an enterprise value of $18.8bn. Nevertheless, HTIL’s shares fell 15.2 per cent as shareholders punished the company for the absence of detail on what it would do with its windfall gain.

Hutchison Whampoa fared better with its shares down 2 per cent on Tuesday, in tandem with a 2.2 per cent decline in the benchmark Hang Seng Index.

Hutchison Whampoa invested only about $2bn in Hutchison Essar after its establishment in 1994, making Mr Li’s latest disposal look like another perfect exit.

“The results [of the transaction] are generally pretty positive,” said one fund manager who has invested heavily in Hutchison but not HTIL. “They got a good price generally in line with what we were thinking.

“HTIL is seriously considering a special dividend, but the market reacted badly because there was not much colour on that.”

Other fund managers with exposure to HTIL were more critical of the lack of information on what would be done with the proceeds from the deal.

“HTIL’s minority shareholders should be celebrating given the windfall that has come,” said one. “Instead, because of the lack of news on distribution, we are suffering a 15 per cent fall. It’s crazy.”

HTIL said the company would announce its plans on February 22. As of June last year, Hutchison Essar accounted for about three-quarters of HTIL’s 23.5m mobile phone subscribers. In a research note issued on Tuesday, Citigroup analysts Anand Ramachandran and Rahul Singh lowered their target price for HTIL from HK$24 to HK$15.50.

“Robust growth prospects in Indian wireless are what drive investor interest in HTIL,” they said.

“The exit from India will drive investor exodus from the stock. The Hutchison Essar sale leaves a cash-rich shell with mature businesses in Hong Kong and Israel, a weak business in Thailand and well-delayed start-ups in Indonesia and Vietnam.”

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