By Yvonne Lee And Wayne Ma
Li Ka-shing's proposed $15 billion purchase of a major British
cellphone operator would be the Hong Kong billionaire's biggest
deal overseas yet and would cement his
telecommunications-and-infrastructure company as one of Europe's
top wireless firms.
Mr. Li's Hutchison Whampoa Ltd. said Friday that it was in
exclusive talks to buy O2 from Spain's Telefónica SA for GBP9.25
billion ($13.85 billion) in cash, plus up to GBP1 billion later, if
the combination of O2 with Hutchison's existing British
carrier--which would become the U.K.'s biggest mobile
operator--meets cash-flow targets. That puts the potential total
price tag for O2 at more than GBP10 billion. Hutchison said the
talks with Telefónica will be exclusive for a "period of several
weeks."
O2 is the third proposed European takeover by Mr. Li's group of
companies this week, following a British train-car maker and a
Dutch drugstore chain. It is set to be the acquisitive
billionaire's biggest-ever foreign purchase and the largest
purchase overseas by an Asian firm since Japan's SoftBank Corp.'s
$21.6 billion buyout of Sprint Nextel Corp. in 2012, according to
data tracker Dealogic.
For the 86-year-old Mr. Li, who began his career selling plastic
flowers in the 1950s and is now Asia's wealthiest man with assets
estimated by Forbes at $33.5 billion, the deal caps a recent buying
spree overseas. Mr. Li's two main companies, Hong Kong-listed
Hutchison and Cheung Kong (Holdings) Ltd., encompass businesses
ranging from property to energy in more than 50 countries, with
combined revenue of 204.49 billion Hong Kong dollars ($26.38
billion) in the first half of 2014. Mr. Li is chairman and has
major stakes that give him effective control of both.
One reason for Mr. Li's push abroad is that his companies
already dominate the economy in their home ground of Hong Kong,
where they own ports, electric utilities and supermarkets. "The
scale that they require isn't available anymore in Hong Kong," said
Danie Schutte, head of conglomerates research at CLSA.
Mr. Li has had interests abroad since 1979, when Cheung Kong
bought Hutchison from Hong Kong Shanghai Bank, now HSBC.
But Mr. Li's recent spending spree has generated $20.7 billion
in deals this month alone, including O2, versus $4.3 billion during
the whole of 2014. Although some analysts say a deal of this size
could make future acquisitions more difficult since the added debt
will bring Hutchison near a self-imposed debt-to-capital ratio of
25%, others point out a planned restructuring of the two main
companies could generate cash that can be used on more investments
abroad.
Hutchison and Cheung Kong also are looking for businesses with
steady cash flow to balance a corporate empire centered on volatile
Hong Kong real-estate holdings. Hong Kong now has some of the
fastest-growing real-estate prices globally but as recently as 10
years ago was still depressed by the 1998 financial crisis and the
outbreak of the SARS virus.
Hutchison gets most of its revenue from retail, property,
infrastructure and port operations.
But its European mobile-phone business, which now contributes
15% of its revenue, is an increasing focus of attention, since
stalling revenue and fierce competition are pushing telecom
companies to seek tie-ups that will let them to get bigger and more
efficient.
Hutchison got into Europe's mobile industry in 1994 when it
launched the Orange brand in the U.K., although it sold the
business to get money for new investments five years later. In the
early 2000s, it spent about $25 billion to roll out the first
high-speed third-generation networks in countries such as the U.K.
and Italy, an effort that weighed on its mobile earnings for nearly
a decade.
In recent years, Mr. Li has bought Telefónica's Irish
subsidiary, O2 Ireland, for about EUR850 million ($1.1 billion) and
Orange Austria, the country's third-largest mobile operator, for
$1.7 billion from France Telecom SA. Hutchison already owns the
Three Mobile network in the U.K., Italy, Sweden, Denmark, Austria
and Ireland.
Three is Britain's fourth-largest wireless carrier, while O2 is
the second biggest after EE. If Hutchison buys O2, it will become
the U.K.'s biggest mobile operator with a 41% share, said UBS
analyst Angus Chan. However, such a big acquisition could be a
stretch for Hutchison's balance sheet as the debt level of the new
company, CK Hutchison Holdings Ltd., is likely to increase after
the split of Mr. Li's holdings, the analyst said.
Hutchison Group Finance Director Frank Sixt said Friday that the
deal would be funded by bank loans and investment from
institutional partners, including private-equity firms.
"We will ask some minority partners to join the investment," Mr.
Sixt said, adding the company intends to sell no more than a 30%
stake in the O2 deal to new partners.
Hutchison's Three Group Europe operations posted a 3% increase
in total revenue to HK$31 billion for the six months ended June
2014. Its core earnings, or earnings before interest, tax,
depreciation and amortization, rose 15% to HK$6.5 billion in the
same period. Mr. Li also has cellphone operations in his Hong Kong
under the Three brand.
Write to Yvonne Lee at yvonne.lee@wsj.com and Wayne Ma at
wayne.ma@wsj.com
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