In terms of the dollar amount it was a big deal, in terms of the level of support, it was pretty interesting but that’s all you can say about the news yesterday that the heavily indebted mobile phone group, Hutchison Telecommunications (Australia) Ltd, plans to raise up to $2.85 billion in new equity to slash its crushing debt burden.
The issue, if not supported by shareholders in Hutchison (HTA), could see its Hong Kong parent boosting its holding to around 97 per cent if there is a 100 per cent shortfall.
The company, which pioneered so-called 3G (third generation) mobile telephony in this country, will raise the funds by way of a pro-rata renounceable rights issue of convertible preference shares.
The raising, which is possibly a record for this sort of security, will cut the company’s debt substantially and improve its bottom line by cutting interest and other funding costs which have been put at around a quarter of a billion dollars a year by brokers.
It will be supported by Hutchison’s Hong parent, Hutchison Whampoa Ltd (HWL), which says it remains committed to maintaining an ASX listing for Hutchison.
HWL is controlled by Hong Kong billionaire Li Ka-shing, reputed to be Asia’s richest man.
This attitude to Hutchison is different to other forms of infrastructure in Australia.
The Hong Kong parent wrote down the value of its investment in Sydney’s Cross City Tunnel well before it collapsed and it is in the books at a negligible amount and HWL is reported to be looking to sell down its stake in another Sydney tunnel project: the one at Lane Cove, which is due to open next Sunday.
Following completion of the rights issue, Hutchison’s debt is expected to be cut to a still substantial but less daunting $1.1 billion. It had debt of $3.7 billion at the end of last month.
Shareholders will be offered 20 converting preference shares (CPS) for each Hutchison ordinary share held at 21 cents per CPS, (which the company says was the 10-day volume weighted average price immediately prior to the date of the announcement yesterday).
The parent says its wholly-owned subsidiary, Hutchison Communications (Australia) Pty Ltd (HCAPL), which currently has a 57.82 per cent shareholding in Hutchison, will take up its full pro rata entitlement.
The balance of the offer will be underwritten by HWL.
HTA lost $759.4 million in 2006 on costs to close its slower-speed wireless network and the continuing costs of growing its 3G business.
The preference shares can start being converted into ordinary shares from two years after listing and will pay annual dividends of about 5 per cent of the issue price. Each pref will convert into 0.85 ordinary shares.
HTA shares closed 2.5c lower at 18c as investors digested the news and realised that the company could be a virtual shell.
HTA said in the notice of meeting
“HWL will fully underwrite the remainder of the Rights Issue (the Underwritten Amount), and it is expected that HCAPL will act as sub-underwriter. As a result of the pro rata participation in the Rights Issue by HCAPL and HWL’s underwriting of the remaining CPS, HWL and its Associates are expected to increase their percentage shareholding in HTAL from the current level of 57.82%.
“The maximum holding of Shares that may result if there is a 100% shortfall in the Rights Issue with no third party sub-underwriting in place, and HWL and its Associates convert all of their CPS, is approximately 97.7% of the issued capital of HTAL.
“Leanrose Pty Limited, which holds 12.37% of the Shares, has indicated that it does not intend taking up its rights under the Rights Issue. The underwriting confirms HWL’s commitment to its global 3G business plans and to HTAL.”
And the last statement is the most important: that after losing billions on 3G in this country and around the world Li is not giving up and is willing to back his judgment with another two billion or more dollars.
But having sold out of rapidly growing India, why would HWL investment around $2.5 billion in a slower growing market and in a company with prospects for more losses?
Is this a way of looking to grab a bigger fish?
Telecom New Zealand is a big shareholder, so what will it do?
