HKT Trust launches IPO of up to $1.4 billion

PCCW is aiming to sell 32% of the trust pre-shoe and is offering a yield between 7.6% and 9%.

PCCW has decided to go ahead with the initial public offering of its telecommunications business through a trust and, as indicated earlier, has set a price range that offers investors a yield of up to 9%. In light of the feedback received during pre-marketing, it has decided to sell only 32% of HKT Trust at this time, however, or up to 35.1% if the greenshoe is exercised in full.

Based on a price range of HK$4.53 to HK$5.38 per share stapled unit, HKT Trust is seeking to raise between HK$9.3 billion and HK$11.05 billion ($1.2 billion to $1.4 billion). The institutional roadshow will kick off today and the final price will be set after the books close on November 22. The trading debut is scheduled for November 29.

HKT Trust, which includes PCCW’s fixed-line, broadband and mobile telecom operations, will be the first trust to list in Hong Kong. It will also be the second-biggest IPO here since the equity sell-off started in August, following Citic Securities’ $1.7 billion share sale at the end of September. While other billion-dollar-plus deals such as Sany Heavy Industry XCMG Construction Machinery have stumbled in the volatile markets, HKT Trust is seen to have a good chance to succeed as its high dividend yield should help attract investors who are looking for more defensive instruments.

According to sources, the bookrunners have received enough interest from investors to make them comfortable to go ahead with the deal. And also to sell a slightly bigger portion than the minimum sought. PCCW, which is controlled by Richard Li, the youngest son of Hong Kong tycoon Li Ka-shing, had earlier said that it would sell between 25% and 40% of the trust, including the greenshoe.

At the low end of the indicated deal size, the group will raise enough to pay off a HK$7.8 billion ($1 billion) loan held by the telecom business, which will ensure more cash will be available to distribute to HKT Trust’s unitholders. And it will also raise an additional $200 million that will be invested by PCCW in its remaining media, IT solutions and property businesses. Any further proceeds will also go to PCCW.

Another aim with the spin-off is to achieve a minimum valuation of HK$28.6 billion for HKT Trust, and that too will be accomplished at the indicated terms. Based on the current price range the market capitalisation will be between HK$29.1 billion and HK$34.5 billion ($3.7 billion to $4.4 billion).

HKT Trust is offering approximately 2.05 billion share stapled units, of which 10% will be earmarked for Hong Kong retail investors. Another 10% has been set aside for PCCW shareholders who will be able to subscribe to units in the trust in proportion to their current holdings. Shareholders can also subscribe to excess units and depending on the demand, PCCW can increase the preferential offering to as much as 30% of the total IPO size. PCCW’s two largest shareholders — Richard Li-controlled Pacific Century Regional Development and China Unicom, which own 21.3% and 18.5% respectively — are expected to subscribe to their entitlements in full. This means close to 40% of the preferential offering is already covered.

As reported earlier, PCCW will also distribute 5% of HKT Trust’s share capital to PCCW shareholders after the IPO. This means a maximum of 40.1% of the trust will end up in public hands and that PCCW will still own between 59.9% and 63% of the trust after the spin-off is completed.

In addition to these two retail and preferential tranches there will also be a public offering without listing (Powl) targeted at Japanese retail investors. The final size of that has yet to be determined, but typically a Powl tranche accounts for no more than 3%-5% of a deal. Powl tranches aren’t particularly common in Asia these days as other pockets of demand are generally seen to be sufficient to cover the deals. However, they have appeared on other yield-play IPOs as well, including on Hutchison Port Holdings Trust’s $5.45 billion Singapore IPO in March. HPH Trust is backed by Hutchison Whampoa, which is controlled by Li Ka-shing.

The rest of the share stapled units will be offered to institutional investors.

The share stapled units will have three components: a unit in HKT Trust; a beneficial interest in one ordinary share of HKT Limited that is linked to the unit; and a preference share in HKT Limited that is stapled to the unit. HKT Limited will be 100% owned by HKT Trust and will be the holding company of the telecom business and its operating subsidiaries. The telecom assets will be managed by a trustee-manager that will be 100% owned by PCCW.

The reason for this complicated structure is for the trust to work under Hong Kong’s existing listing rules. Richard Li initially intended to list the telecom business as a business trust, and was pushing the Hong Kong regulators to put a regulatory framework in place for such listings. However, the progress was quite slow, and during the summer, Li and the mandated banks changed course and started working on an alternative structure.

For investors, there will be little difference versus a Singapore-listed business trust. The share stapled units will be traded as one entity and HKT Trust has committed to distribute 100% of its adjusted funds flow as dividend, which should result in a dividend that is higher than the accounting profit.

Based on the joint bookrunners’ forecasts, the price range translates into a 2012 yield of between 7.6% and 9%, which is significantly higher than the average 5.5% to 6.5% dividend yield paid by telecom operators in other developed Asian countries. The management’s own forecast is slightly more conservative and would result in a 2012 yield between 7.5% and 8.9%.

One source noted that HKT Trust also holds up well compared with other telecom operators on an enterprise value-to-Ebitda basis. In other words, investors don’t have to pay significantly more for the extra yield on offer. Telecom operators in developed-Asia trade at an average 2012 EV/Ebitda multiple of 6.9 times, which compares with 6.7 to 7.4 times for HKT Trust at the indicated price range.

CICC, Deutsche Bank, Goldman Sachs, HSBC and Standard Chartered are global coordinators and bookrunners for the offering. DBS and J.P. Morgan are joining them as bookrunners. Mizuho will act as the Powl manager.

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