Does it make sense for a company to dilute its stake in one of the world’s fastest growing developing economies to finance losses in a struggling operation in mature markets? That is what Hutchison Whampoa is effectively doing with its planned IPO of Hutchison Telecommunications International (HTI).
It’s a strange double IPO: HTI comprises carriers in Hong Kong, as well as stakes in operators in India, Thailand, Israel, Sri Lanka, Paraguay, Ghana, and Macau. Its most important holding is in a group of Indian carriers, which provides 44.5% of total revenue. This, in turn, is to be spun out of HTI in an IPO that will inevitably dilute HTI’s holding.
No one could accuse Hutchison Whampoa of being an unintelligent company. It is one of the pillars of the Hong Kong economy with revenue in 2003 of $18.66 billion, and interests that encompass ports, telecommunications, property and hotels, retail and manufacturing, energy, and infrastructure.
Nor does this diverse range of operations means that telecommunications did not get the focus it needed. In the most significant deals of the evolving mobile communications business, Hutchison Whampoa could be found at the center of events, making huge profits on its investments.
While it began its telecommunications business in Hong Kong in 1985, it quickly saw the potential in Western markets. In Europe, it built what became one of the most innovative operators, Orange, which it floated before Mannesmann bought the company for $34.2 billion. This left Hutchison with a 10.2% stake in Mannesmann. So when Vodafone won a contested takeover with a $180 billion bid for Mannesmann, Hutchison was again left with a healthy profit.
It was just as successful in the US. In 1999, Hutchison paid $1 billion for 30% of VoiceStream Wireless and subsequently injected a further $957 million to support the company’s merger with GSM rival Omnipoint, which diluted Hutchison’s stake in the enlarged VoiceStream to 23%. When Deutsche Telekom made a successful bid for VoiceStream in 2000, Hutchison was able to realize a $9.5 billion return on a $2 billion investment in just over a year.
Perhaps these enormous early successes, during a period of vastly over-inflated stock market conditions, led the company to believe that there were unlimited rewards available to those who invested in this market. Certainly, it was seduced, along with the rest of the industry, by a belief that 3G technology offered an easy way to squeeze more money from subscribers.
Its decision to plunge into the 3G market suffered from the start by delays in deliveries of handsets. This has meant that, in markets like the UK, it has had a limited opportunity to build market share while the established operators caught up.
It now has 3.2 million customers worldwide and recruited 2.5 million of them in its first six months to August 31. But the big operators are preparing to fight back. Vodafone, for example, has announced a range of 3G handsets that will be on the market in the crucial pre-Christmas period.
Certainly, former partners appear to have lost faith in Hutchison’s 3G ambitions. Netherlands incumbent KPN sold its 15% stake in Hutchison’s 3G UK operation for $150 million after a legal battle between the two companies. NTT DoCoMo swapped its 20% investment in the same business for a stake in HTI.
Who can blame them? In its first year of operation, Hutchison’s 3G operations lost $1.2 billion as the shortage of handsets restricted revenue to $259.6 million, and in the first half of the current financial year, 3G lost $1.1 billion on revenue of $475.3 million.
Investors are worried, and so Hutchison is forced to raise money by cutting its interest in developing markets. It is a dubious strategy. If anything, it ought to be increasing its investments in fast expanding markets such as India rather than buying market share in saturated Western markets where profits are an extremely distant prospect.