To reassure investors that all is well with its venture into 3G mobile telephony, Hutchison Whampoa has given the telecoms industry a new financial term.
Executives at the Hong Kong-based conglomerate, controlled by tycoon Li Ka-shing, call it “Ebitda less all CAC” – the traditional earnings measure minus customer acquisition costs.
Having missed its 2005 target for achieving positive 3G earnings before interest and tax, Hutchison argues that the “Ebitda-CAC” line item shows it is at least closing in on that goal. Excluding customer acquisition costs of HK$11.4bn (US$1.5bn) last year, up from HK$8.4bn in 2004, its 3 Group would have recorded positive ebit of HK$1.825bn in 2005.
The company invented the term to take account of “the market’s focus on the cash cost of building the 3 Group’s business,” says one Hutchison executive. “The metric gives a better understanding of whether and when the businesses have achieved operating cash flow sufficient to cover growth investment in CAC.”
Hutchison’s eagerness to accentuate the positive reflects the degree to which its €20bn ($24bn) foray into 3G has come to dominate investors’ perceptions of the company, overshadowing its other businesses. These include the world’s biggest container port operations and the largest health-and-beauty retailing empire outside the US.
The company’s total operating losses from 3G amounted to HK$36.28bn last year, down from HK$38.45bn in 2004. The company says the 3 Group will book positive earnings in 2006 even after customer acquisition costs are taken into account, noting that its UK and Italy operations achieved this “cash flow milestone” on a monthly basis late last year.
“We really want to get to critical mass while our competitors are still wavering,” Canning Fok, Hutchison managing director, recently said. “We grew subscribers like mad.”
He highlighted a 65.5 per cent increase in 3G subscribers and an increase in the percentage of higher-spending post-paid subscribers in the UK and Italy, to 56 and 19 per cent respectively. Lucrative non-voice revenues now contribute 23 and 30 per cent of total revenue in the UK and Italy, which together account for 85 per cent of the company’s worldwide subscriber base.
Citigroup analysts Anil Daswani and Kadir Lim are less flattering in their analysis of Hutchison’s results. Mr Daswani and Mr Lim point out that the company’s UK and Ireland subscriber base grew a modest 11 per cent since August, when the 3 Group announced its interim figures, “suggesting an incredibly high churn [rate]”.
The long-running debate over whether Hutchison’s 3G glass is half full or half empty is a frustrating one for company executives, who argue that their 3G business has been misunderstood by the market, analysts and media. “The overall environment for telecoms has been very poor,” admits Frank Sixt, group finance director. “Everything we think is distinct about our business is not recognised by the marketplace . . . we’re not enthusiastic for the sake of being enthusiastic.”
Mr Fok, who lights up when describing 3G handsets’ multimedia applications, adds: “3 Group is a broadband media company. [Our customers] think they bought a telephone – in fact they bought a broadband computer.”
One unintended consequence of Hutchison’s 3G adventure has been relentless speculation about the conglomerate’s next spin-off or asset sale, especially after it scrapped a planned float of 3 Italia because it could not obtain the valuation it sought.
Last year, disposals of a 19 per cent interest in Hutchison Telecommunications International and 20 per cent of its Hong Kong port operations helped the company book an 11 per cent rise in net profit.
But most attention has focused on its 35 per cent-controlled Husky Energy, based in Canada.
Hutchison, which admits receiving expressions of interest from potential buyers, is adamant that it has no plans to pawn Husky for cash. Says Mr Sixt: “There’s no such thing as a buyer if there’s no seller. The real upside is oil sands – obviously this is the future of Husky. Happily we are the largest holder of that asset in the world.”
Hutchison first bought into Husky in 1987, and Mr Sixt argues that Hutchison’s 3G gambit will deliver a similar long-term pay-off. “Just wait,” he says.