Is a Hutchison 3G Withdrawal from Europe Imminent?
An analyst note from Merrill Lynch has resurrected the debate about the future of Hutchison 3G (H3G) in Europe, suggesting that a sale could be imminent. Their report focuses primarily on the benefits to the telecoms industry as a whole from losing a competitor from the market, but certainly cited some compelling reasons why a sale could occur fairly shortly.
Merrill Lynch believes that H3G has a number of exit options, including the possibility of swapping its various network and customer base assets for small stakes in the main European operators, or a sale entire to Vodafone. This would allow H3G to benefit from its tax credits and avoid crystallising a loss now, arguably near the bottom of the telecom valuation cycle. The company would also benefit from shareholdings in network operators who themselves would benefit from lowered competition.
The window for a sale is also closing, as Merrill Lynch notes. The regulatory environment is starting to normalise, which will have a negative impact on the new 3G entrants. Currently, H3G benefits in most markets from preferential inbound call termination rates - almost a subsidy from the incumbent operators. This will start to reduce over the next few years as the regulators start pulling 3G termination rates down to the same level as the incumbent operators.
H3G also tends to calculate its cost of acquisition for each subscriber at a different formula to other operators, which could be creating a short term flattering of the accounts and an unreal EBITDA. With H3G's reportedly high churn rates, these acquisition costs will need to be recalculated and that could affect the headline annual results. Another factor is the company is building up a war-chest in the form of tax credits. Merrill Lynch estimates that this could be worth as much as EUR3 (US$3.8) billion by now. However, some of the tax credit accumulated in Italy could start to expire next year, again leaving a small window of opportunity for a sale to benefit from this.
The report concludes the sales prospectus for H3G noting that the company's peak funding is expected to exceed EUR20 (US$25) billion and with the cash flow still negative, there are three possible options. The company could simply continue as it is, with a possible improvement from 2008 onwards. The company could attempt to restart its failed IPO in Italy, and possibly in other countries. Or finally, a sale or asset swap with the other European operators.
The idea of a H3G exit or merger may be more likely than some think. H3G has had a number of previous ventures in Europe including the Rabbit telepoint launch in the UK in the early 1990s, and then the successful building of Orange and subsequent sale to Mannesmann in 1999. H3G has also owned direct or indirect stakes in other European telcos in the past, such as Deutsche Telekom (via Voicestream), France Telecom, and Vodafone as parts of various deals. H3G's management team from those deals remains mostly in place."
Posted to the site on 16th October 2006
