On Tuesday, it was reported that two non-binding expressions of interests were put forward to PCCW. Those bids were reported to be worth upwards of HK$40 billion to HK$50 billion ($5 billion to $6.4 billion) in overall size. Although, in a recent press release PCCW noted that these amounts were inaccurate and somewhat speculative.
However, despite the respective initial offers, credit analysts believe that any transaction undertaken by the winning bidder will probably not surpass $6 billion, based on the total amount of debt the underlying core assets of the purchase can service.
The consensus among fixed income analysts is that any leveraged buyout (LBO) financing would initially consist of an injection of equity and a sizable bridging loan that will eventually be taken out by a combination of a term loan facility and international bond offering.
Should the deal by funded in this manner, analyst estimate that the market could effectively reconcile with a debt to Ebitda ratio of 5.5 times for the telecom and pay-TV assets of PCCW, mostly represented by HKTC. At this level, HKTC could load up some $5 billion plus in debt to finance the transaction.
At the end of 2005, HKTC was generating an Ebitda of $870 million, with a total debt of $3.29 billion. Of that, $833 million were bank loans that will be required to be repaid upon any change of ownership. With total outstanding bonds worth $2.456 billion û that have no covenant to default under a change of ownership, HKTCÆs current debt to Ebitda stands at 2.8 times - a ratio that puts it squarely into the BBB rating range.
Given HKTC's stable and recurrent income, analysts estimate that an additional $2.5 billion can be loaded up at the HKTC level by any potential suitor. A ratio of that size would cause the ratings of HKTC to nevertheless drop to low double-B from the current BBB/Baa2. At that rating, any future deal would effectively become a high-yield offering, but considering the strong position of the assets it should still be attractive enough to appeal to a large amount of investors.
Using the widely held rule of thumb of 80/20, in terms of debt and equity used to finance these types of acquisitions, a debt component of around $4.8 billion, should see an equity stake of $1.2 billion û giving a total size of $6 billion.
The next question that will need to be addressed in terms of any subsequent debt deal is whether the winning bidder opts to take on the existing debt or leave it with PCCW. The covenants of the debt have no restrictions in terms of transfer of ownership. However, at the moment, despite some conflicting statements form the parties involved, it is probably too early to tell.
PCCWÆs outstanding 2011, 2013 and 2015, are relatively cheap and would be a rather inexpensive form of funding for any prospective buyer. However, as yet Macquarie has said that if it is to win the contest it does not intend to assume the outstanding debt, while Newbridge has yet to formally announce its intentions.
Market conjecture notwithstanding, any prospective buyout has a number of hurdles to surpass before it can be completed. Not least of which is the requirement of consent of China Network Communications Group Corporation (China Netcom), which owns 20% of the company, under the 2005 subscription agreement. Approval must be granted if PCCW were to look to sell more than 10% of the voting interest in the company and its subsidiaries in HKT or more than 25% of the group's voting interest in PCCW Media.
Lehman Brothers has been hired as advisor to PCCW for the deal. PCCW operates local, mobile and international telecommunications services, as well as, internet and interactive multimedia services through its pay-television unit NOW TV.