Hong Kong conglomerate Hutchison Whampoa has set the price range for the forthcoming HKSE and NYSE listing of Hutchison Telecommunications International (HTI). Pre greenshoe, the company will offer 25% of HTI's existing share capital through an issue of 1.15 billion old shares.
The price range has been set at HK$6.59 to HK$7.63, netting potential proceeds of $HK7.58 billion ($972 million) to HK$8.77 billion ($1.12 billion). Pricing at this level will result in a market capitalization of HK$3.8 billion to HK$4.4 billion.
This represents a 24% to 12% discount to consensus syndicate fair value assumptions around the HK$5 billion mark. Given that most IPO's price at a 10% to 20% discount to fair value, market participants have been expecting this kind of price range since details of the deal first emerged at the beginning of pre-marketing two weeks ago.
But what has changed since then is the percentage of share capital HTI will issue. Initially, most syndicate bankers had been expecting a freefloat of about 30% pre greenshoe, which would have netted Hutch proceeds of about $1.2 billion to $1.4 billion.
From the outset, however, lead manager Goldman Sachs kept the potential freefloat flexible so it could size the IPO according to market conditions. A slightly lower than expected figure suggests the lead believes it needs to give the momentum a bit more of a push.
According to the current schedule, official roadshows begin in Hong Kong today (September 20) and will wrap up on October 6, ahead of pricing on October 7.
When Hutch first mandated the IPO earlier this year, it hoped to achieve a fair value of about $6 billion. By the time it came to pre-marketing it had become far more realistic in its ambitions. However, market participants remain divided on just how attractive the valuation is because it is so complex.
Based on the formal price range, the deal is being marketed on an EV/EBITDA range of about 8.5 to 9.5 times 2005 earnings. Yet, the EBITDA, and too a lesser extent the net debt figures, underlying this calculation are more subjective than many IPO's.
This is because the disparate business profiles of the group require a sum of the parts valuation. And the larger the number of earnings drivers the more open the valuation to individual interpretation.
The net debt figures, for example, depend on how fund managers account for shareholder loans in their calculations. Without them, net debt was only $1.5 billion during 1H04. With them it is $4.6 billion.
Where EBITDA is concerned, the Hong Kong mobile operations have historically been the main driver. For example, in 2002 they generated EBITDA of $45.38 million. This represented 115% of the group's $39 million EBITDA thanks to losses elsewhere.
In 2003, the figure had jumped to $80 million, or 66.9% of the $118 million EBITDA generated.
In 1H04, on the other hand, the mobile operations generated an EBITDA loss of $5 million because of the start-up costs associated with the migration to 3G. Key to fund managers calculations, therefore, will be how quickly HTI can overcome these losses and once more underpin the EBITDA of the entire group.
The other current drag on profitability is the start-up costs associated with HTI's Thai operations. This resulted in an operating loss of $142 million in 2003 and $60 million in 1H04. But if HTI can turn this cash drain into a profit fairly quickly, it will have a major impact on its EBITDA.
The two main earnings drivers so far this year have been HTI's fixed line operations in Hong Kong and its mobile operations in India. The former generated EBITDA of $30 million in 2003 compared to a loss of $34 million in 2002. In 2004, the fixed line operations generated $14 million plus a further $166 million in EBITDA from the disposal of shares in Vanda.
The Indian operations have been the star performer and analysts expect this to continue. In 2002, for example, they generated EBITDA of $9 million, jumping tenfold to $90 million in 2003. During 1H04, the figure was up again to $55 million.
Stripping out the $166 million HTI made from the one-off sale of Vanda shares, the Indian operations accounted for 108% of 1H04 EBITDA.
During pre-marketing soundings, HTI has been telling fund managers that although the Indian IPO has no formal timetable, it is likely to come later than official filings indicate. The company has said it will almost certainly not happen this year and is likely to come later than the first half of next year.
Delaying the IPO will make HTI's offering far more attractive as funds have been looking at ways to gain exposure to the fast growing Indian cellular market, which still has a penetration rate of just 2.67%. Many funds will automatically prefer to trade the stock in Hong Kong or New York for regulatory reasons. But even those funds that have been trading the Indian market have not found it that easy.
As one specialist points out, "The only available stock is Bharti Televentures and it is nearly always at its foreign shareholding limit."
HTI's offering has also been bolstered by Bharti's recent share price performance. At the beginning of pre-marketing the stock was trading around the Rs134.5 level, representing an EV/EBITDA multiple of about 11.5 to 12 times 2005 earnings. Since then it has traded up 10% and closed Friday at Rs149.6.
HTI will include a number of Hutchison's 2G and 3G assets in Hong Kong, India, Israel, Thailand, Sri Lanka, Paraguay, Ghana and Macau.