If one was to design a conglomerate perfectly suited to the financial zeitgeist, Hutchison Whampoa would be agonisingly close to it. Its portfolio of ports, emerging market mobile, Chinese property, regulated public infrastructure and oil exploration and production seems staggeringly prescient. That Hutch shares have stagnated for the past two years is due to its sixth, gammy, leg: 3G mobile in Europe. Unfortunately for Hutch, the limp is not going away.
3G is just a fifth of proportionate sales, and a third of book assets, but continues to cripple Hutch’s profit and loss account. Excluding exceptional items, 3G turned Hutch’s underlying first half pre-tax profit of $1.2bn into a $302m loss. After all handset costs and capital expenditure, the 3G unit lost $1.3bn on an operating cash flow basis. That is about half last year’s level, but the unit’s trajectory is fading; yesterday Hutch delayed its target for break-even before capex by six months to mid 2007.
Hutch has abandoned its tactic of floating minority stakes in 3G. With little product differentiation, buying market share in Europe’s mature mobile industry remains a very tough strategy to sell to investors. The sale of a stake in the Italian 3G business to an investment bank, which Hutch argued established a valuation floor at book value, has actually been treated as debt in its latest accounts.
Selling the UK unit could make sense but is not on the agenda. Hutch’s doggedness is expensive. The company is asset rich but, including 3G, cannot cover its interest costs or dividend. Since 2004, net debt has been unchanged at about $18bn, despite $8bn of disposals in core businesses.
Yesterday the chairman, Li Ka-shing, 78, said he was under “no pressure” to sell the holding in Husky Energy. The 3G unit has so far been presented as a troubled silo within a healthy group. Still, the failure of the 3G limp to cure itself now risks compromising the near flawless touch Hutch has displayed elsewhere.