Australia | Mar 20 2007
By Chris Shaw
It has been long awaited but Hutchison Telecommunications (HTA) has finally announced details of a restructuring that will significantly strengthen the company’s financial footing.
The proposed renounceable 20:1 issue of convertible preference shares at $0.21 to raise as much as $2.85bn will allow the company to significantly reduce its debt levels. However, as Macquarie points, out the issue will also reduce much of the leverage minority shareholders have to any valuation upside from improved performance.
The reason is major shareholder Hutchison Whampoa will underwrite the issue, meaning its current stake of 58% could increase significantly if there is a shortfall. JP Morgan notes a total take-up of shares by the parent would see its stake move to around 97%, prompting speculation the balance of the company will then be compulsorily acquired. This is despite Hutchison Whampoa stating it remains committed to a domestic listing.
While some shareholders will accept the offer a shortfall appears certain, Credit Suisse noting 12.5% shareholder Leanrose has already indicated it won’t be taking up its entitlement. Macquarie estimates the issue implies a valuation per share of 24.7c, so given the share price is well below this level many shareholders are likely to ignore the opportunity to put further money into the stock.
While this increased holding for Hutchison Whampoa will be a negative in terms of existing shareholders being further diluted, the positives from the issue are the retirement of debt and the bringing forward of positive earnings.
According to JP Morgan the issue will see net interest expense fall to around $90m annually, representing a saving in the order of $250m. This will bring forward the timetable for the company to generate free cash flow by as much as five years to FY09, the broker forecasting a profit in FY10.
Macquarie has an even more optimistic timetable and estimates the company would become earnings per share and free cash flow positive in FY08, two to three years earlier than it had expected. On the broker’s revised numbers its earnings per share in FY08 will be 0.4c from minus 28.9c previously, while free cash flow increases to 12c per share from minus 15.7c previously.
Credit Suisse is a little more neutral on the deal’s benefits, pointing out while the company’s financial position will certainly improve it will be at time when Telstra (TLS) is becoming more aggressive in the mobiles market, which implies a lower rate of revenue and subscriber growth. Despite this, it is positive on the stock and rates it as Outperform, the only broker in the FNArena database to do so. There is also one Sell rating, along with five Hold recommendations.
The deal has implications for more than just Hutchison though, as Telecom New Zealand (TEL) has a 19.9% stake in a joint venture with the company in its H3GA network. Under the restructuring Hutchison is likely to ask Telecom to add its share, GSJB Were suggesting this could result in the company being required to tip in as much as $300m to retain its stake.
The broker suggests this threatens the size of any potential capital management initiative the market had expected following the upcoming sale of Telecom NZ’s directories business, something shareholders may not be too happy with.
Macquarie agrees, noting the market has been less than impressed with the company’s ventures in the Australian market to date, so investors are hardly likely to be happy to see further money invested here rather than returned as a special dividend or other initiative.
The FNArena database shows Telecom New Zealand is rated Overweight only once, compared to three Hold ratings and five Reduce/Sell recommendations.
Shares in Hutchison last traded at 18c, while Telecom New Zealand is currently down 5c at $4.00.