For those who took the assurance by Vodafone’s chief executive Chris Gent, made last November, that Hutchison is a “happy shareholder” of Vodafone at face value, Hutchison’s second convertible must have been a shock. On January 8 Hutchison Whampoa, the Hong Kong-based telecom, property and port company, issued a $2.5 billion three-year bond exchangeable into 536 million Vodafone shares – equivalent to 0.8% of all outstanding shares. The deal, managed by Merrill Lynch and Goldman Sachs, comes only three months after a similar $3 billion landmark issue in September, and one months after Gent met Hutchison chairman Li Ka-shing. This meeting resulted in Gent’s statement that “Li is not a seller at anything like today’s prices” – which were then well above the £2.20 at which the exchangeable was issued.
In Hong Kong, analysts don’t recall Li Ka-shing saying that he would hold on to Vodafone indefinitely. Instead, they recall, he had said it was a good stake until something else came up, which is why the exchangeable left analysts there speculating about a secret investment alternative.
“A sale of shares, at some stage, was likely,” says Mark Conway, director of convertible bond research at CSFB, “as Vodafone was not a strategic investment.” Hutchison only obtained a 5% share in Vodafone because it received Mannesmann shares on the sale of its stake in Orange to the German company, which in turn was bought by Vodafone in February 2000. A $5 billion block sale in March reduced the holding to 3.6%, and if the two exchangeables are converted, it will be left with another 1.7%.
Meanwhile, a banker at Merrill Lynch says somewhat defensively, though correctly: “technically Hutchison has not sold any shares”. By issuing exchangeable bonds at a premium of £3.10 Hutchison has, in fact, made “a bullish statement that shares of Vodafone will perform.”
However, this vote of confidence sounds less resounding when one considers that Hutchison does not really risk much if its view doesn’t prove right. “If Vodafone shares don’t go up to £3.10 in three years’ time, Hutchison could simply issue another $2 billion exchangeable from which to pay the redemption amount of the existing one,” points out Jeremy Howard, global head of convertible research at Deutsche Bank.
And if Hutchison really expects the shares to perform so well, would it not hold on to them?
Hutchison executives declined the opportunity to outline to Euromoney the thinking behind the deal, leaving it to others to air their theories. One, rather kinder than most to Vodafone, is that Hutchison, seeing bond spreads widen and equity valuations falling, foresees a credit crunch and wants to arm itself with a cash cushion sooner rather than later. Since the convertible market has not experienced the same degree of scepticism toward telecoms as the straight bond and equity markets, this exchangeable could be seen as a cheap funding exercise.
However, in Hong Kong Hutchison is not seen as a desperate company. It has a huge amount of cash at its disposal. Nor is it really a telecom company – only around 20% of its assets are in this sector. One banker utters the widespread opinion that it would be “unwise” to bet against Li Ka-shing, who is famed in Asia for getting the best returns on his investments.
Li’s outstanding skills don’t stop there. He has made a name, says one banker, as the “master of managing the leads” – making sure they pay up for the privilege of being lead-managers on Hutchison transactions. “Particularly with this deal they have left the bulk of the execution risk with the leads,” says the banker. “I would be surprised if the leads are not sitting on a pile of Hutch debt.”
The exchangeable was not priced in a book-building process but was a bought deal in which the leads underwrite securities at a reference price – in this case one that is attractive to Hutchison – and run the risk that share prices fall during execution, leaving underwriters with low-yielding bonds and high premium call options on the underlying stock.
It’s no longer common for leads to take on such risk on large equity-linked deals in volatile markets, but it’s not so uncommon either to relax the rules when dealing with Li Ka-shing. His disapproval could
