It is deeply ironic that Telstra is selling the Hong Kong-based CSL mobile phone business that was regarded as the better of the assets it acquired in a controversial set of deals in 2000, while retaining the one regarded as the biggest blot on its post-privatisation copybook.
The $2 billion sale to Richard Li’s HKT Ltd returns CSL to its original owner. It was Li, the younger son of Hong Kong billionaire Li Ka-shing, with whom Telstra created the Reach cable and satellite joint venture. This was just before the dot-com and telco bubble burst in 2000 and the market for international capacity imploded. As a result, Telstra was forced into a $1 billion write-off.
In fact, because it had paid for its share of the joint venture by vending in its existing assets in the region at bubble-inflated values and extracted $700 million of cash in the process, it wasn’t as disastrous as it seemed. However, the $US900 million haircut that its non-recourse bank lenders were forced to digest is still an unpleasant memory within Telstra.
Two years ago, Reach was restructured. Telstra and PCCW divided the assets, and Telstra emerged with 100 per cent of the core infrastructure and one of the best and most extensive networks in Asia.
It is now investing heavily – about $650 million – in leveraging the network with cloud computing services and facilities, data centres and an expanded footprint of points of presence in the region. It is seen as a major growth engine for Telstra in a post-NBN environment.
At face value, CSL could also have been regarded as a key asset in that environment, particularly given Telstra’s stated ambitions of expanding in Asia. It is the leading and most profitable mobile operator in Hong Kong and has performed strongly over the past three years. It has revenues of about $1 billion a year.
The Hong Kong market is one of the most (if not the most) mature and competitive mobiles markets in the world. Mobile penetration in Hong Kong is above 230 per cent, and there are five established operators with more planning to enter the market.
It is also a very sophisticated market. All the operators have rolled out 4G networks using Long Term Evolution technology.
As David Thodey said today, it is a market “ripe for consolidation”. Telstra, he said, had been looking at its options in Hong Kong for about 18 months, but had received what he described as a “very full” offer.
The $US2.425 billion valuation of all of CSL (Telstra owns 76.4 per cent and New World Development, which merged its mobiles business with CSL in 2006, 23.6 per cent) equates to about 9.5 times the business’ earnings before interest, tax, depreciation and amortisation. It will generate a $600 million or so profit for Telstra.
The deal is subject to regulatory and PCCW securityholder approvals, although the fact that HKT is a relatively small player in the highly contested Hong Kong market suggests the regulators shouldn’t be a major obstacle to the deal.
Thodey said that Telstra is still looking for opportunities to build its capabilities in the region, citing its recently listed online auto site, Autohome (the leading auto site in China) as an example. The listing values Telstra’s stake in the business at $US1.9 billion.
Thodey and chief financial officer Andy Penn wouldn’t be drawn on their plans for the cash the sale will release, which will add to the $4.6 billion to $5.1 billion of free cash flow Telstra has said it expects to generate this financial year.
It could, however, either undertake some form of capital management or devote the proceeds to the largely organic strategy it has been pursuing in Asia. Thodey did say that “bolt-on” acquisitions were a part of the strategy.
CSL was seen as providing Telstra with both leading-edge experience in operating next generation networks in an intensely competitive market. It also provided proximity, and perhaps a platform, if an opportunity to enter the giant mainland China market arose.
Thodey said today that it would be some years before China allowed foreign companies to enter the market, and that if there were an opportunity to establish a business on the mainland, the sale of CSL wouldn’t preclude it.