Hutchison Telecommunications International (HTI) priced its Hong Kong and New York Stock Exchange IPO at the bottom end of a revised range yesterday (October 7) raising a total of HK$6.99 billion ($889 million). The 1.15 billion share deal was priced at HK$6.07 per share compared to a revised range of HK$6.07 to HK$7.11 and initial range of HK$6.59 to HK$7.63.
The institutional order book is said to have closed about 2.5 times covered and the retail order book about 40% to 50% covered. The disappointing retail take-up meant that lead manager Goldman Sachs had to re-jig final allocations, which were initially scheduled to split 90% international and 10% domestic retail.
The exact split had not been finalized as FinanceAsia went to press, although specialists say that institutions are now likely to receive 80%, Hong Kong retail 5%, US retail 5% and a Japanese POWL, run by Daiwa SMBC, the remaining 10%.
They reiterate that a deal could have been priced within the original range, but say Hutchison Whampoa decided to revise it down on Tuesday because it wanted to deepen institutional penetration and make sure the offering trades up during the secondary market. As a result, the institutional book is now comfortably covered and will constitute the bulk of the deal.
Commentators are likely to make comparisons with China Shipping, whose $985 million IPO this June was similarly scaled back because of poor demand. It also went on to sink fairly quickly in the immediate aftermarket.
However, specialists argue that the two are very different beasts since HTI has been placed with institutional investors, while China Shipping had to pull in a lot of favours from its corporate clients to clear the market. Instead of bedding the deal down with institutional demand, China Shipping's lead managers allocated corporates 36.5% and the POWL a hefty 19.5%.
HTI's supporters point out that the company's IPO has been placed with global telecommunications investors who have done their homework and broken down a complex and difficult valuation.
"It took a long time for fund managers to build their models but now they're happy with the pricing they'll hold onto the stock because they believe it's been priced fairly," says one observer. "This deal has one of the strongest institutional order books I've seen in a long time."
Few would disagree that the lead had a difficult job on its hands to get to this stage. HTI shares many similarities with Singaporean cellular operator Starhub, which priced a $271 million IPO on Tuesday.
Neither company pays a dividend and both are loss making. What differentiates them is the size of their offerings and respective ambitions of the vendors.
HTI represents the world's third largest telco deal this year and the company can at least congratulate itself on pricing at a premium to the regional average. At HK$6.07 per share, the deal has been valued at 8.3 times 2005 EV/EBITDA.
By contrast, Starhub priced at 5.7 times 2005 EV/EBITDA, around the regional average for Asian cellular plays. Integrated telcos (ex Japan) are trading slightly higher around the 6.5 to 7 times level.
Yet HTI has been subject to a barrage of criticism from ECM bankers and plagued by negative headlines from the very outset. And for Li Ka-shing - the businessman who personifies the very essence of Hong Kong - such flimsy retail demand can hardly be viewed as anything other than deeply disappointing and acutely embarrassing.
HTI's critics contend that management were far too greedy and have no-one to blame but themselves for the negative headlines their aggressive valuation has ensured. A number further argue that a borrower with Hutchison Whampoa's track-record should have realized that if the company set off on a back foot, the deal was never going to generate sufficient momentum to drive pricing up.
At issue is why Hutchison Whampoa chose to spin off some of its telecommunications assets in the first place. During roadshows management argued that the IPO should be viewed as a strategic transaction rather than a financial one.
"Management want to create a stand-alone company that can be valued as a consolidator and aggregator in its own space," says one observer.
As such they believed the list co and its parent could realize value from spinning a number of the telecommunications assets out of the conglomerate.
However, with 3G losses looming over the parent's balance sheet it was always going to be difficult to convince fund managers that Hutchison was looking to create shareholder value. This was made doubly difficult by HTI's current earnings profile.
Critics argue that an IPO in 2004 does not make sense at all when so many of the company's core assets are "temporarily" loss-making. Once the one-off gain from Vanda is stripped out of HTI's first half earnings, for example, EBITDA amounts to only $4.7 million.
For a lot of fund managers it seemed like there were just too many "ifs and buts" to a valuation at a time when investors are desperate for certainty. Some critics believe that had HTI waited another year it would have been able to show a more consistent earnings profile that would have attracted investors in their droves.
By this point, the cash drain of the company's Thai operations would have diminished, the start-up losses associated with the company's 3G operations in Hong Kong might have been reversed and the Indian operations would have had a longer track-record.
Traditionally, Hong Kong mobile has been a core earnings driver. In 2003, for example, the business generated EBITDA of $80 million. During the first half of 2004 it suddenly dropped off because of 3G start-up costs and the group turned in negative EBITDA of $5 million.
In all of this, the star potential of the group's Indian operations appears to have been lost. Between 2002 and 2003 EBITDA jumped tenfold to $90 million in a country where the penetration rate is still only 2.67%.
Bharti Televentures, India's only listed telecommunications play, is currently reaping the full benefit of this. Since HTI began pre-marketing the stock has risen 15% and is now trading on a 2005 EV/EBITDA valuation of about 13 times, the highest of any Asian telco.
Second to Bharti is HTI's other main comparable Singapore Telecommunications. The combination of the group's core earnings in Singapore and Australia plus a strong growth kicker from Indonesia, Thailand and the Philippines has pushed up its valuation to 10 to 11 times 2005 EV/EBITDA.
In the context of these two comparables, HTI's listing has not been the success the parent was hoping for. Yet it has benefited its own share price, which has marginally outperformed the Hang Seng Index. Since mid May when both hit their year-to-date lows, Hutchison Whampoa has risen 26%, while the HIS is up 21%.
For fund managers that can see through the various start-up losses and have continuing faith in management's undeniably strong operational track-record, the current share price has a lot of upside potential. At HK$6.07, it has been priced at a steep 30% discount to the syndicate's $5 billion fair value estimates for the entire company.
And specialists report a significant number of jumbo orders from tier 1 accounts in a book that had about 150 investors in total. By geography, initial estimates suggest that 40% was placed in the US, 35% in Asia and 25% in Europe.