Billionaire Li's win in Italy snaps string of deal setbacks

[HONG KONG] The approval of billionaire Li Ka-shing's plan to merge his Italian telecommunications assets with those of VimpelCom Ltd snaps a string of setbacks the Hong Kong tycoon has faced in the past year and paves the way for him to turn around his least profitable market in Europe.

In the agreement, 3 Italia SpA - a unit of Mr Li's flagship CK Hutchison Holdings Ltd - and VimpelCom's Wind Telecomunicazioni SpA would merge, with the two parents each owning 50 per cent stakes. The Hong Kong company has previously valued the total value of deal at 21.8 billion euros (S$33.1 billion), with 7.9 billion euros coming from the CK Hutchison side.

Mr Li, 88, has reason to pursue consolidation in Italy. Among the six European markets where Mr Li has telecom operations, Italy is his second-largest market by subscribers but the least profitable one. The merged entity is expected to provide more than 5 billion euros in savings by reducing overlapping costs and providing negotiating leverage for network equipment purchases, according to the companies.

Bolstering his Italian business would also help Mr Li diversify away from the UK, his biggest profit generator, as Britain's decision to split off from the European Union threatens to undermine the economy.

CK Hutchison shares rose as much as 4.3 per cent, the biggest intraday gain since Sept 9, as of 10:31am in Hong Kong.

Though the Italian merger could pave the way for the entry of Iliad SA - a concession Mr Li and VimpelCom made to get the merger approved by regulators - the combination will lead to a "significant uplift" in earnings, HSBC Holdings Plc analysts Samuel Hui and Derek Kwong wrote in a report on Aug 17.

Mr Li may also keep a close eye on Denmark and Sweden, which are the only two existing European telecom markets where CK Hutchison hasn't attempted to push consolidation, according to the analysts.

As to the merged Italian business, it would have more than 31 million mobile subscribers, representing 36 per cent of the market, according to Goldman Sachs Group Inc estimates.

That would edge above Telecom Italia SpA's 35 per cent and the 29 per cent market share held by Vodafone Group Plc's local unit.

Mr Li has increased his exposure to telecom assets in recent years. The sector accounted for 23 per cent of earnings before interest and taxes at CK Hutchison in 2015, up from 4 per cent in 2010, according to Goldman Sachs estimates.

Mr Li's expansion in the industry would have been greater had European regulators not blocked the tycoon's plan to buy Telefonica SA's O2 and merge it with his local assets to create Britain's largest mobile-phone operator.

The O2 verdict in May was among the biggest setbacks the Hong Kong dealmaker has coped with recently. In August, Mr Li's attempt to buy a stake in electricity network Ausgrid was rejected by Australian government.

Last year, a US$12.4 billion buyout offer for one of his units was rejected by Hong Kong minority shareholders.

BLOOMBERG