Hutchison Whampoa has completed the sale of a $2.5 billion bond exchangeable into shares of Vodafone Airtouch - the UK's largest company and the largest mobile telecommunications company in the world. With the sale, Hutchison now has a gross cash position of around $25 billion ready to be invested in global third generation (3G) mobile assets. The deal was concluded just before midnight Hong Kong time yesterday.
The exchangeable bond was sold with an exercise price of GBP3.5941 per Vodafone share at a conversion ratio of 196.61, which represents a 35% conversion premium to yesterday's closing Vodafone ADR price. The bonds have a three year maturity and carry a coupon of 2.875%. The bonds are non-call for life and are counted as senior, unsecured obligations, guaranteed by Hutchison Whampoa.
The 144A, Reg S bonds were issued at par and will be redeemed at par. They were placed with over 300 accounts with 50% going to Europe and the UK, 10% going to Asia and 40% being sold within the US. There is a $500 million over-allotment option ready to be exercised until September 22.
The bonds are rated A by Standard & Poor's and A3 by Moody's. Hutchison remains, however, on credit watch negative with S&P due to the rating agency's concern over the risks involved in the adoption of a 3G business strategy.
Nevertheless, bankers close to the deal stressed that this structure gives investors a very clean way to invest in the risky future of the mobile sector. Investors will get exposure to one of the biggest and best names in the global mobile market along with a very valuable embedded option on Vodafone. They get the credit protection of Hutchison Whampoa which trades at Hong Kong's sovereign ceiling. And they get a very clean and simple deal with none of the usual cross-border complications.
"This is a very high quality piece of paper," says a banker close to the deal. "You would be hard pressed to find a better credit with a stronger underlying stock packaged in a simpler structure."
For Hutchison, the structure of the deal allows it to raise $2.5 billion in cash on the back of shares that are only worth around $1.7 billion. Moreover, with a coupon of 2.875% that gives the Hong Kong conglomerate effective debt financing at 320 basis points below treasuries. The structure also allows Hutchison to keep the dividends it gets from the Vodafone shares, as well as maintaining voting control and sale rights.
The deal is another in a long line that Hutchison has done to switch from second generation mobile telephony to third generation systems, licenses and businesses. Hutchison's 5.2% stake in Vodafone was acquired when its original investment in Orange was bought by Mannesman which in turn was bought by Vodafone. Hutchison has already sold down 1.73% of Vodafone and this deal further reduces its stake by 1% so that it now only owns 2.7% of Vodafone.
Merrill Lynch was sole bookrunner and joint lead manager on the deal and HSBC was joint lead manager without books.