Hutch gets £3.1b from GIC, funds for O2 bid

Hutchison Whampoa secures £3.1 billion of investments from GIC, Canada Pension Fund, and three other funds in exchange for a 33% stake in the combined British O2 and Three business.

Hutchison Whampoa said on Friday that it has entered into an agreement with five institutional investors to sell a third of the combined Three and O2 UK business for £3.1 billion ($4.72 billion).

One of the investors, Singapore sovereign wealth fund GIC, said in a separate release that it plans to invest £1.1 billion, meaning the remaining £2 billion would be covered by Canada Pension Plan Investment Board, Abu Dhabi Investment Authority, CDOQ of Quebec Canada, and BTG Pactual of Brazil. 

The five investors have agreed to pay £2.8 billion in cash and potentially another £329 million in deferred upside interest payments. The proceeds will be used, together with a £6 billion loan facility provided by HSBC, to fund Hutchison's acquisition of UK mobile subsidiary O2 from Spanish telecoms group Telefonica.

Hutchison, controlled by Hong Kong tycoon Li Ka-shing, agreed in March to pay Telefonica up to £10.25 billion ($15.2 billion) for UK mobile phone firm O2, to add to the smaller UK mobile operator called Three that it already owns.

The deal has an indicative price of £9.25 billion, to be paid up front, and a further £1 billion of "deferred upside interest sharing payments" once the cash flow and combined businesses of Hutchison 3G UK and O2 UK reach an agreed threshold.

According to Bank of Communications analyst Alfred Lau, the investments will help Hutchison share its investment cost and scale up its UK mobile operations. It will also help the company, which is being re-fashioned into a global conglomerate, to build up its war chest for more deals.

"After the merger, Hutchison will focus on more M&A opportunities. Now [that] they have five more investors coming in to share the investments, they have an even bigger war chest to go out and look for more opportunities," Lau said.

Group finance director Frank Sixt had already said in January that Hutchison Whampoa was mulling the possibility of sharing the risk of buying O2 with other partners including private equity players. A source familiar with the matter in March said that there was a preference for sovereign wealth and pension funds because they have longer-term outlooks.

Private equity funds typically also want control over investments and Hutchison was only selling a minority stake in the combined business.

Scale game

The investments by GIC and the four other institutional investors depend on Three completing its acquisition of O2 and O2's subsequent combination with the Three business, which would be subject to a EU competition ruling.

According to a report by Fitch, Hutchison as of June 2014 had a 12% market share in the UK, but that could rise to more 40% if the deal is concluded. 

“It’s a scale business and you need to be big these days, to provide better, faster, cheaper data delivery service that customers expect,” David Brabbins, a consultant for global branding firm Prophet, said.

The acquisition will enable Hutchison to better compete in a market that is fast consolidating. UK mobile operators T-Mobile and Orange merged in 2010 to form EE. Fixed line operator and former O2 parent BT in February agreed to buy rival EE for £12.5 billion.

HBSC and Moelis are joint advisers to Hutchison on the acquisition.

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