Li Ka-shing set to win approval for 3 Italia's buyout of a competitor

Hong Kong

HE may be 88 and facing setbacks from failed deals in the UK and Australia, but investors bet against Li Ka-shing at their peril.

Hong Kong's richest man is set to win approval as early as this week for 3 Italia's buyout of a competitor that would create the country's biggest telecom operator. The deal is more important for Mr Li than an aborted one in Britain that would have made his company that nation's top mobile-phone provider.

There's no doubt that the past couple of years haven't been kind to Mr Li's global ambitions. Having invested billions of dollars in European utilities and telecom businesses, the billionaire was thwarted in his attempt to buy a stake in electricity network Ausgrid two weeks ago, just three months after his acquisition of Telefonica's O2 unit in Britain was blocked by regulators.

Then the Brexit vote happened, and the UK, which made up 39 per cent of first-half earnings before interest and taxes at Mr Li's flagship CK Hutchison, became less of a dependable investment destination. The falling pound sterling has dragged down profit at the conglomerate, which owns a slew of water, electricity and telecom assets in Britain. Mr Li warned earlier this month that the fallout from Britain's decision to leave the European Union would last for years. Back home in Hong Kong, minority shareholders rejected a US$12.4 billion all-stock bid by Cheung Kong Infrastructure for his Power Assets division, a takeover that would have tightened Mr Li's control of a cash pile totalling more than US$8 billion.

On top of it all, Mr Li was accused of deserting Hong Kong, which now makes up just 4 per cent of CK Hutchison's Ebit (earnings before interest and taxes), and China, which accounts for 12 per cent. Six years ago, the former British colony contributed about 27 per cent of Ebit to Hutchison Whampoa, the former incarnation of his biggest publicly traded company.

But Mr Li, who has a US$31 billion fortune, wasn't dubbed Superman by Hong Kong media for nothing. This month he posted better-than-forecast earnings at CK Hutchison and real estate unit Cheung Kong Property. The flagship can now look forward to a further boost to profitability from its Italian mobile operations.

Following some concessions, CK Hutchison has been given approval to merge its 3 Italia unit with Wind Telcomunicazioni, Russian firm VimpelCom's telecom business, people familiar with the matter told Bloomberg News last week. The bigger chunk of the market that the two companies will control will enable the Italian business to lift its Ebitda (earnings before interest, taxes and amortisation) margin from a paltry 18 per cent, the lowest among CK Hutchison's telecom operations in Europe. By contrast, margins at the UK business are 41 per cent.

Analysts at Deutsche Bank reckon that approval for the Italian deal could raise CK Hutchison's Ebitda by as much as 8 per cent. CK Hutchison shares have picked up after being hammered following the Brexit vote in June, rising 21 per cent as at Friday's close from this year's low on July 8. CK Property has also gained, climbing 12 per cent over the same period.

Of the 15 analysts that cover CK Hutchison, 13 rate the stock a "buy", while only one has a "sell" rating. Some 14 analysts have "buy" ratings on CK Property, versus two sells.

The uptick in optimism over CK Hutchison's earnings prospects points to Mr Li's enduring ability to time markets and stay ahead of the pack, even as the company has battled a slump in global trade flows at its ports division and the drag on its retail business from a decline in tourist arrivals in Hong Kong. BLOOMBERG