Second equity deal of the year for HKT Trust

An undisclosed shareholder has raised $180 million from an accelerated placement in the Hong Kong telecoms company.

Taking advantage of strong share price momentum, an undisclosed shareholder offloaded a 2% stake in Hong Kong-based telecoms group HKT Trust and HKT Ltd after Wednesday's close.

The deal by the subsidiary of PCCW raised HK$1.4 billion (US$180 million) after being upsized from 120 million share stapled units to 150 million on the back of strong demand.

Lead manager Morgan Stanley pitched the deal at a price range of HK$9 to HK$9.20 per unit, representing a 7.6% to 5.5% discount to the stock's HK$9.74 close. Final pricing at HK$9.05 equated to a 7.1% discount.

This is relatively wide by Hong Kong standards but reflects investors’ need for upside given how well the share price has performed this year. The larger than expected deal also amounted to a fairly weighty 38 days trading volume based on six-month averages. 

Sources close to the deal said 80 accounts participated in the transaction, with a broad mix of sovereign wealth funds, yield players and long-only accounts across Asia, Europe and the US. Allocations were focused on the top 20 accounts, which received 85% of the units on offer. 

The Hong Kong telecoms sector has significantly outperformed the broader Hong Kong market year-to-date, with HKT Trust and HKT Ltd up 26.3% to Wednesday’s close. At current levels, the group is trading at about 24 times 2014 earnings, a premium to both of its smaller rivals, Hutchison Telecommunications on 19.81 times and SmarTone on 20.95 times.

All three operators have been on a strong rising trend over the past three months. Analysts have attributed this to HKT's $2.43 billion acquisition of CSL New World Mobility in May.

The takeover not only removed one of the city’s five mobile players but also the one considered to be the biggest market disrupter. As a result of the acquisition, HKT has become the city’s biggest operator in both the mobile and fixed line sectors.

In June, the group announced a HK$7.9 billion (US$1.01 billion) rights issue to re-finance the US$2.5 billion 18-month bridging loan it took on board to finance CSL's acquisition. Morgan Stanley was also one of the leads of this transaction alongside Citigroup, Deutsche Bank, Goldman Sachs, HSBC and Standard Chartered.

Existing shareholders were offered shares on an 18 for 100 basis and at HK$6.84 – a 20.65% discount to the stock's June 12 close. The rights issue closed on July 15, with a 99.38% acceptance rate, including PCCW, which agreed to subscribe pro rata to shares to maintain its 63% stake.

Successful completion of the rights issue also prompted both Moody's and Standard & Poor's to upgrade their ratings. Moody's revised its outlook on the group's Baa2 rating from negative to stable, while Standard & Poor's took its BBB stable rating off CreditWatch negative.

In its ratings release, Moody's commented that HKT’s debt to Ebitda remains high for the Baa2 ratings category but this negative factor is mitigated by the group's status as Hong Kong's only quadruple play across mobile, fixed line, broadband and IPTV. Pre acquisition, HKT's debt to Ebitda stood at 3.2 times in 2013, spiking to 4.5 times post completion on a 2014 basis.

Standard & Poor’s said that using proceeds from the rights issue to pay down the bridging loan should reduce debt to Ebitda to about 3.5 times on a 2014 basis. The average for the BBB ratings category is about three times.

At the beginning of August, HKT also released its first-half results, incorporating CSL from May 14. These revealed a 13% year-on-year increase in group revenue, with a 15.3% jump in Ebitda.

Analysts believe the merged HKT and CSL group could realise synergies of up to HK$1 billion a year from 2016, although some are starting to caution that this is already reflected in its share price.

Reuters, for example, shows that nine houses currently have a hold recommendation on the group, with seven still maintaining buy or outperform ratings. 

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