Shares in Hutchison Telecoms sank to a five-month low on Wednesday, hit by reports that government scrutiny could delay a planned sale of $11.1 billion in Indian assets to Vodafone Plc.
Bonds in its parent Hutchison Whampoa, billionaire Li Ka-shing’s ports-to-retail conglomerate, also weakened despite analysts saying the markets fall was a knee-jerk reaction that should dissipate.
“There’s probably not too much downside from here,” said Antony Mak, director at DBS Vickers. “The delay seems to be over a technical matter and I think the sale will proceed.”
Earlier this year, Hutchison Telecommunications International Ltd. agreed to sell a majority stake in Hutchison Essar – India’s fourth-largest carrier – to Vodafone.
But the Economic Times reported on Tuesday that India’s government was investigating the structure of the Hutchison Essar deal to see if it contravened caps on foreign ownership.
Hutchison Telecoms declined to comment on Wednesday, although spokeswoman Mickey Shiu said on Monday the firm was in full compliance with relevant investment laws.
A spokesman for Vodafone brushed off the report, saying: “We remain on track and still expect to close in the second quarter, as originally expected”.
Shares in Hutchison Telecoms recovered to end the day down 4.4% at HK$14.76. Vodafone slid 0.5% to 140.16 pounds.
The yield spread on benchmark 2033 bonds from Hutchison Whampoa widened by 2 basis points (bps) to 139/137 bps above U.S. Treasuries after the reports.
The cost of insuring Hutchison’s debt also rose. Its five-year credit default swaps (CDS) – insurance-like contracts that protect against default and restructuring – widened by 1 basis point to 21/23 bps.
PROMISE OF INDIA
With more than 150 million mobile subscribers but a market penetration of only around 15 percent, India is the world’s biggest mobile market behind China, the United States and Russia.
At its current pace of expansion, India will have half a billion mobile users by 2010.
Chief Executive Arun Sarin expects the envisioned Vodafone Essar, which will rank behind Bharti Airtel, Bharat Sanchar Nigam Ltd. and Reliance Communications, to become India’s top operator in three years.
Vodafone plans to swap the Hutch brand in India with its own, accelerate capital expenditure, promote low-cost handsets and introduce new services suited to the vast country – such as money transfers over cellphones.
But the agreed sale has not been problem-free: an earlier irritant to Vodafone’s plans appeared resolved after Hutchison announced it had provisionally agreed to pay $415 million to Essar – a major shareholder in the target firm – in return for the Indian group’s cooperation in completing the deal.
And the Economic Times followed on Wednesday with a report that India’s tax department was claiming about $1.9 billion in capital gains tax from the sale of the stake.
The deal, if it goes through, is expected to generate a profit before tax of about $9.6 billion, the paper cited tax officials as saying.
Yet analysts in Hong Kong advised optimism. “I’m not pessimistic about the stock,” said Steve Cheng, associate director at Shenyin Wanguo. “Eventually, the sale will go through.”
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