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Li Ka-shing controlled Hutchison Whampoa is eyeing its largest acquisition ever.
In an exchange filing on Friday, the company said it has entered into exclusive negotiations with Spanish telecoms group Telefonica for the potential acquisition of its UK mobile subsidiary O2 for up to £10.25 billion ($15.4 billion).
The deal has an indicative price of £9.25 billion, to be paid upon closing, and "deferred upside interest sharing payments" of up to a further £1 billion once the cash flow and combined businesses of Hutchison 3G UK and O2 UK reach an agreed threshold.
HBSC and Moelis are joint advisers to Hutchison on the acquisition and HSBC is sole provider of a £6 billion loan financing. UBS is advising Telefonica.
If the acquisition goes through it will make Hutchison, which already operates the 3 Mobile network, the UK's leading mobile phone operator. According to a report by Fitch, Hutchison as of June 2014 had a 12% market share. But that could rise to more 40% if the deal is concluded.
With former state monopoly BT group in talks to acquire EE, currently the UK's largest mobile operator, the UK market is poised for consolidation.
Hutchison's move to enhance its position in the UK is similar to what it has done in other markets. "It’s in line with what they have done earlier in the European telecom sector with the Austria Orange acquisition and the Ireland acquisition," Cindy Huang, an analyst at Standard & Poor's, said. "It’s another step for them to improve their market position."
O2 would nonetheless be an acquisition on a much larger scale. Huang said there is no immediate impact on S&P's A-rating on Hutchison but that she would continue to assess the situation once there is more clarity on the deal.
Similarly, Fitch said that there is no immediate impact on its A- rating on Hutchison.
Conference call
Hutchison could end up sharing some of the risk with other partners. In a conference call, Hutchison's finance director Frank Sixt told reporters that the company could ask private equity players to join in the deal, though they will not take a stake larger than 30%.
"We are willing to have some minority partners just so that it's consistent with what we’ve said of Hutchison’s risk appetite and our desire to maintain our balance sheet ratios and ratings," Sixt told reporters on a conference call.
Despite the ambitious size of the deal, Huang said that in the past Hutchison has been disciplined in keeping its debt levels down. "They have a strong commitment to their financial policy of net debt to net capital of 25%," Huang said. "At this stage our expectation is that they will manage in such a way that it doesn’t move their financial metrics too much."
In the filing, Hutchison also said that the transaction remains subject to due diligence on O2 UK, agreement on terms, and the obtaining of the usual corporate and regulatory approvals. Sixt told reporters that it wouldn't be completed until mid 2016.
The news comes shortly after Li revamped the holdings of his two flagship companies, Cheung Kong Holdings and Hutchison Whampoa, in an effort to create better value for shareholders.
CK Hutchison Holdings (CKH Holdings) will hold all the non-property businesses of both groups, becoming a multinational conglomerate with assets ranging from telecoms and ports to infrastructure assets, while CK Property Holdings will hold the property businesses.
The octogenarian Li has been paring his exposure to Hong Kong and China and picking up yielding assets in regulated overseas markets such as the UK and Australia.
Earlier this week, Cheung Kong Infrastructure and Cheung Kong Holdings agreed to jointly buy Britain's Eversholt Rail from private equity owners for an enterprise value of £2.5 billion.
Elsewhere, Cheung Kong Infrastructure and Power Assets are jointly bidding for Fortum’s Swedish power grid and have gone through to the second round, according to one source familiar with the matter.
