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Saturday, 16 December 2017

2000: PCCW’s US$12bn financing for takeover of HKT – jumbo LBOs hit Asia

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Paving the way - To many in the UK, Doncaster is a slightly down at heel town in Yorkshire, boasting (if that is the right word) a perennially under-achieving football team. For all those involved in financing the US$35.9bn takeover of Cable & Wireless HKT by Pacific Century CyberWorks in early 2000, though, the name means something very different.

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To many in the UK, Doncaster is a slightly down at heel town in Yorkshire, boasting (if that is the right word) a perennially under-achieving football team. For all those involved in financing the US$35.9bn takeover of Cable & Wireless HKT by Pacific Century CyberWorks in early 2000, though, the name means something very different.

Indeed, the name is etched into their memories and imprinted on their resumes. It is synonymous with audacity and also with the groundbreaking and defining transaction that paved the way for subsequent multi-billion M&A financings from Asia.

Doncaster Group was a wholly-owned subsidiary of PCCW, which raised US$12bn in loan financing to back the giant bid for C&W HKT.

“Deals like this don’t come along very often,” one banker had said just a week after PCCW lined up four banks in late February 2000 to provide the acquisition financing.

Those were prophetic words. To this day, no other loan from Asia (ex-Japan) has come close in enormity, challenge and successful execution.

It is still the largest M&A loan from Asia ex-Japan and it came at a time when Hong Kong’s syndicated loan market was very small – PCCW’s borrowing was larger than the entire volume of syndicated loans completed in the territory the previous year.

It was a crowning moment for the four leads – BOCI Capital, BNP Paribas, Barclays and HSBC. And yet when the quartet set about selling down their underwriting exposure, few would have expected the outcome.

Launched mid-March 2000, the selldown was completed a month later – perhaps the fastest execution for such a gigantic financing from Asia. Twenty-seven lenders agreed to sub-underwrite, committing US$22bn between them and definitively ruling out the need for general syndication. Of those banks invited, only two were believed to have declined to take part.

PCCW was a mere investment holding company with hardly any operating history when it outbid other more established players such as Singapore Telecommunications to acquire C&W HKT. It was able to do so simply because PCCW was formed by Richard Li, the younger son Li Ka-shing, the Hong Kong tycoon – and a man with whom banks across the industry wanted to curry favour.

It wasn’t just Richard Li’s family connections that got the deal away, though. The deal came at a time when the TMT boom was still booming.

Staggering

The loan’s take-up was all the more staggering given the status of the deal that the banks were supporting. At the time the loan was signed, the HKT acquisition had yet to go through. The structure of the deal afforded the lenders no recourse to PCCW itself, as it was secured over the HKT shares that were being bought. Had the acquisition failed – and there was a moment when it seemed it would – the banks would have been left with a loan with no security to a creditor with no assets.

The hangover of the M&A and the heavy debt load led to PCCW returning to the loan and bond markets frequently in subsequent years. For that reason, lenders that took part in the deal had no cause for regret, given the amount of follow-on business the company generated.

It is another matter that equity investors reposing faith in PCCW at the time lost their shirts – the company’s market capitalisation currently represents less than 10% of the price it paid to acquire C&W HKT.

The financing was split into a US$5.4bn 364-day loan, a US$3.6bn 364-day facility with two extension options at the end of the first and second years, and a US$3bn 90-day tranche. Only the first two tranches were syndicated, with banks joining with US$1bn in underwriting commitments receiving 220bp all-in for the first year, 325.5bp for two-year exposure and 435bp for three-year risk based on an initial margin of 115bp over Libor.

“The PCCW deal was a real success, and not just because of its size – though it was 2-1/2 times the size of Japan Tobacco’s US$5bn deal in 1999,” Clarence Tao, head of Asian loans at BNP Paribas, told IFR at the time.

“The execution time was very short and it had a very, very good hit ratio. Neither the structure nor the credit were straightforward: here was a bridge acquisition with a quick take-out needed to prevent the costly term-out provision.”

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