Page 16 - Sphere No.8 (Mar 2003)

SPHERE
14
In 1999 the global economy
was soaring and the telecoms
industry was exuberant. Hutchison
itself had helped set off a buying
and take-over frenzy when in
November 1999 it sold Orange, its
European 2G mobile telecommuni-
cations business, to Mannesmann for a
US$14.6 billion profit. (Soon after,
Orange again changed hands, this time
to Vodafone whose aggressive bid for
Mannesmann saw investors push up the
price of the stock deal to a world record
US$163 billion.)
In April 2000, a bidding war for next
generation 3G-licence spectrum began
in the UK, sending prices into the
stratosphere. Spurred on by a wave of
euphoria among analysts, bankers, investors and the media,
operators – including Hutchison – collectively spent £22 billion
(about US$33 billion) on five licences in the UK alone, and
around E150 billion across Europe.
When the German 3G-licence auction attracted bids worth
US$45 billion in July 2000, Hutchison again set the tone – this
time dropping out in the belief that the prices had gone too high.
The subsequent decline of global
markets saw share prices tumble, with
the telecoms sector among the biggest
casualties. Several operators have sub-
sequently been crippled by the high
prices they paid for licences. Some have
delayed the heavy investment needed
to build the 3G infrastructure,
preferring to capitalise on their
existing 2G networks. Others have
had to offload assets to stay afloat, and
yet others have written off their 3G
licences and withdrawn completely.
In this roller-coaster economic
environment the bulls turned
bearish, citing high capital investment costs
along with technical issues, competing technologies and
potentially low take-up rates that could all derail operations.
Hutchison was not immune from the fallout:“All available
evidence indicates that Hutchison is trying to do too much,
too fast,” the Far Eastern Economic Review reported in October
last year. “Hutchison is presuming it’s already mastered
technological and business paradigms that other operators expect
will take years to develop,” the magazine quoted Forrester
Research as saying.“If it turns out to be right, it deserves to reap
C O V E R S T O R Y
UK: Raising the Bar
WHEN THE FINANCE TEAM OF
Hutchison 3G UK (H3G UK) set about
raising £3.24 billion of non-recourse
financing (about US$4.6 billion) in mid-
2000 to develop the technology and
infrastructure of its 3G operations, it
looked like a tall order.
Stock markets were heading steeply
south and positive sentiment towards
telecommunications companies had all but
dried up.
As Project Finance International Magazine
reported: “H3G UK had no assets other
than the licence – no customers, no cash
flow and barely any employees. The
technology was untried and the market
bears doubted whether anyone would even
want to buy into the 3G proposition. It
didn't look at first sight like the kind of
company that anyone would lend £3,000
to, let alone £3,000 million.”
Yet against this less-than-buoyant
backdrop, H3G UK’s financing was
completed in March 2001 with proceeds
of £3.24 billion (US$4.6 billion) in the form
of a three-year (plus one-year) non-
recourse facility, including £777 million of
vendor financing from Nokia, NEC
and Siemens.
Demonstrating its confidence in 3,
Hutchison itself joined the syndicate,
lending money to its subsidiary at the same
rate as the banks but at a subordinate
level, meaning the banks would be paid out
first in the case of default.
At the time, it was the largest non-
recourse syndicated loan ever arranged in
the UK.
In spite of the prevailing negative
sentiment, H3G UK had attracted
investors to support the roll-out of its 3G
business proposition.
The key messages to investors were
Hutchison’s track record in establishing
and adding value to telephone networks
and its highly diversified financial strength,
which at the time included a balance sheet
of cash and marketable securities of more
than US$20 billion above total borrowings.
“Hutchison Whampoa is fortunate in
having a strong track record of creating
value coupled with a financially div-
ersified background,” said Mark Nickell, a
banker at HSBC, one of H3G UK’s lead
underwriters.
“If required, it can support from
internal funds the large capital-intensive
investments needed to create that value.
This provides enormous credibility to both
its investment and its commitment.”
Richard Woodward, senior manager,
finance, at Hutchison said raising the non-
recourse debt had not been about selling a
vision but successfully communicating the
sense and soundness of the business plan.
“It was obvious from early on that we
would have to win the minds of bankers
over the background noise of the press,
BANKING ON QUALITY
Apart from the almost US$10.2 billion invested by Hutchison in nine 3G licences, the Group’s 3G operations have also been
very successful in attracting additional financing to build the networks and the brand.
NEXT GENERATION
Edwin S. Grosvenor, the great-grandson of the inventor of
the telephone,Alexander Graham Bell, examines a 3 handset
– 156 years after Bell’s birth on March 3, 1847
.