26 October 2016
Bagging O2 might have turned out to be a pyrrhic victory for CK Hutchison. Photo: Bloomberg
Bagging O2 might have turned out to be a pyrrhic victory for CK Hutchison. Photo: Bloomberg

Failure of O2 deal may be blessing in disguise for CK Hutchison

As in real life, the most interesting developments in the stock market are the unexpected ones.

Many individual investors chased US-listed Chinese stocks last year, hoping to make a risk-free profit when these companies returned, as many intended, to mainland China to relist at higher valuations there.

But these investors held back after the China Securities Regulatory Commission said it would review the negative impact of relisting these stocks.

The multibillion-dollar bid by Li Ka-shing’s CK Hutchison Holdings Ltd. (00001.HK) for O2, a British mobile operator, is very likely to be blocked by the European Commission.

But that loss may turn out to be a gain given the risk of Brexit.

The share price of CKH tumbled 6.4 percent in the past month, compared with a 1.3 percent drop in the benchmark Hang Seng Index.

It was one of the worst-performing blue-chip stocks, in a sign that investors were concerned about the prospects for the multibillion-dollar deal.

CKH has been able to stand out from local blue-chip stocks in recent years mainly because the company has acquired many infrastructure, energy and telecom assets in Europe at good prices.

However, the failure of the O2 takeover might hamper the conglomerate’s future efforts in that direction.

The deal was reached and announced in March last year, and market participants predicted at the time a 50-50 chance of its obtaining regulatory approval.

The deal would have joined CKH’s Three UK, the fourth-largest mobile operator in Britain, with Telefónica SA’s O2, the second-largest.

But the deal is unlikely to go anywhere given tightening anti-trust scrutiny in Europe in recent years.

Rather than the share price of CKH receiving a boost from the deal, it has plunged from HK$120 after the restructuring last year to HK$92 at present.

Economic recovery in Europe was showing strong momentum when the deal was announced last year.

The Bank of England forecast growth in Britain’s gross domestic product of 2.9 percent last year, but growth turned out to be only 2.2 percent.

British GDP growth even eased to 0.4 percent in the first quarter of this year.

The latest poll shows that 45 percent of Britain’s voters are in favor of Brexit — leaving the European Union — against 44 percent who believe Britain should remain in the 28-member bloc, ICM figures show.

Brexit might bring tremendous change for Britain and a sweeping economic shock.

CKH intended to consolidate its telecom business in Britain, Ireland, Italy, Denmark and other European countries after acquiring O2.

However, the entire plan might be thwarted by the Brexit.

So, if the deal is blocked by the European Commission, CKH could save millions of dollars, since Europe’s economic recovery is disappointing and there is a high risk of Brexit. 

Luck is essential for investment as well as in life.

Li raised over HK$10 billion (US$1.29 billion) through a rights issue in 1987, on the day the US stock market crashed.

The developer used the proceeds to expand amid the market downturn and develop big housing projects including South Horizons and Laguna City, enabling his company to grow substantially.

In another bit of perfect timing, CKH listed its ports service division, Hutchison Port Holdings Trust, in Singapore on March 10, 2011. One day later, global stock markets plunged as a result of the March 11 earthquake and tsunami in Japan.

In the telecom sector, CKH reaped more than HK$100 billion from the sale of telecom businesses in India and Israel in 2007 and 2009. 

Both governments have revised their telecom policy, and industry players are suffering from a slump in profits and a plunge in share prices.

A thumbs-down from the European Commission for the firm’s purchase of O2 might turn out to be a blessing in disguise.

This article appeared in the Hong Kong Economic Journal on May 9.

Translation by Julie Zhu

[Chinese version 中文版]

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