PCCW’s new media and telecom company, HKT Group, could be worth more than $8 billion, including the debt it plans to issue, according to sources involved with the deal. Minus debt, some sources say that the asset would be worth more than $3 billion.
But financing the deal, completing it, and earning a sizable return later won’t be easy, say bankers working on the deal, in part because HKT wants to maintain an investment grade rating on its debt.
Would-be buyers are attracted by PCCW’s steady cash flows and commanding market position at a time when big, attractive buyout targets are hard to find across the region. Expressions of interest in the auction for a 45% were due last week.
In addition to making the numbers stack up, bidders will have to get comfortable with a complex mix of players, including the Chinese government and Li, the younger son of Hong Kong’s richest man, Li Ka-shing.
“A lot of sponsors have put PCCW in the ‘too hard to make work’ basket,” says an investment banker close to the process, referring to private equity firms.
UBS AG is advising PCCW on the deal. The two took the rare step of posting a 23-page expressions of interest document online for all to see, hoping to show that the process will be transparent and open to all interested parties. One such party may be state-run China Netcom, which owns nearly 20% of PCCW.
“We have not come forward to bid for HKT at the moment, but we may not rule that out,” says Li Tao, a Netcom spokesman.
TPG Capital and Australia’s Macquarie Group are also pursuing a bid for HKT, according to sources.
The two firms previously bid for a controlling stake in PCCW’s core assets in 2006. That deal fell apart amid resistance from China Netcom as the Chinese government balked at Hong Kong’s main fixed-line carrier falling into foreign hands.
China has blessed the current auction because only a minority stake is for sale and it comes as China restructures its own telecom sector.
HKT’s earnings before interest, taxes, depreciation and amortization rose 12% last year to $899 million. Revenue rose 13% to $2.6 billion.
All of the potential buyers mentioned declined to comment.
PCCW, Hong Kong’s former monopoly fixed-line carrier, also runs broadband services including a popular pay-TV offering, and offers mobile services. In May, the company announced that it planned to fold its core media and telecoms businesses into a separate firm and sell 45% of the new company. PCCW shares are down more than 90% since 2000.
The announcement sparked the interest of private equity firms, even though a deal is unlikely to produce the kind of return they’re used to. Those bidding for HKT are looking at an atypical deal, however, and not just because it’s a minority stake.
HKT plans to raise a big chunk of debt and maintain an investment grade rating. That means buyout firms can’t borrow as much money, as the more debt a company piles onto its balance sheet the more pressure in its credit rating. Therefore, buyout shops in the hunt will need to kick in more equity to make up the difference.
“You’re not going to be able to maximize leverage so you’re looking at a lower return,” says another investment banker involved in the deal. —Michael Flaherty and Vinicy Chan