On the 24th March 2015, Hutchison Whampoa, an
investment holding company based in Hong Kong, announced that they are set to
create Britain’s largest mobile network after agreeing a £10.3bn deal to
acquire O2 in the UK from Spain’s Telefónica (South China Morning Post, 2015).
You may be wondering why a Hong Kong investment company, that
at first made its success from specialized in real estate and ports in Hong
Kong, would want to purchase O2. This is because the group actually owns numerous
telecommunication businesses such as Hutchison Telecommunications Hong Kong
Holdings (HTHKH) and the Three Group. The company intends to combine this new
acquisition with it other telecom company in the UK (Three mobile) to create
the largest mobile network in the UK, bringing together 31m customers, or about
41% of the UK wireless market (Financial Times, 2015). The deal is likely to
result in financial synergies e.g. a lower cost of capital, strengthen the
investment company’s portfolio (diversify risk), and generate additional shareholder
wealth. However, the deal is still subject to regulatory approvals.
The company estimates that it could make cost savings of around
£3bn to £4bn from the deal, which will be financed with £6bn of debt and £3bn
in equity from sovereign wealth funds. An upfront payment of £9.25bn will be
followed by £1bn when annual free cash flow reaches £1.8bn (Financial
Times, 2015).
Figure 1: Telefónica share
price prior to the announcement
 |
| Source: Telefonica (2015) |
The takeover announcement was made on Tuesday the 24th
March 2015, yet Telefónica’s share price had been increase from the 19th
of March [See Figure 1]. Based on the hypothesis that the stock markets are
efficient (Fama, 1970), in my opinion, this indicates the announcement was anticipated.
Inside information may have been leaked in the days leading up to the announcement
of the deal. This suggests the market could be in the strong, yet inefficient
form. Share price appears to reflect all known information and even appears to
reflect information that had not been released. In addition, Jensen and Ruback
(1983) suggest that, corporate takeovers generate positive gains for target
firm, benefiting their shareholders, thus share price is likely to increase
prior to the announcement, which can be seen above. The academic literature
also suggests that the bidding company’s share price will decrease when a deal
in announced, however this is difficult to argue in this case [See Figure 2]. Perhaps
investors see the acquisition and potential market dominance as a positive move
for the company. Similarly, one could be argue that since there was a lot of speculation
of the deal back in April 2014 (Telegraph, 2014), the share price may already
reflect the information that the deal would be likely to occur (Ball and Brown,
1968). It will be interesting to find out what happens to both the companies
share prices once the deal has been either approved or rejected by the
competition commission.
Figure 2: Hutchison
Whampoa share price around the time of the announcement
The aim of the takeover is to create shareholder wealth. I
believe this deal, if approved, will generate additional shareholder wealth for shareholders of Hutchison Whampoa in the long term due to benefits stated above,
despite the academic literature suggesting this may not be the case. In addition, I
also think that this deal will face sharp scrutiny from the European regulatory
authorities due to the reduced competition in the market, which will likely result
in a long investigation from the European Commission (EC). The EC may conclude that the conglomerate may
have too much dominance in the UK telecommunications market, and the deal may
fall through, which will be a major obstacle to generating additional shareholder
wealth, as currently three mobile is a small player in the market.  |
| Source: Hutchison Whampoa (2015) |
References
Ball, R., & Brown, P. (1968). An empirical evaluation of
accounting income numbers. Journal of Accounting Research, 6(2),
159-178. Retrieved from Ebsco http://search.ebscohost.com
Fama, E. F. (1970). Efficient capital markets: A review of
theory and empirical work. The Journal of Finance, 25(2),
383-417. doi:10.1111/j.1540-6261.1970.tb00518.x
Financial Times (2015). O2
deal catapults Three from smallest to biggest UK mobile group. Retreived 25th
March 2015, from http://www.ft.com/cms/s/0/37f13900-d2e9-11e4-a792-00144feab7de.html?siteedition=uk#axzz3VKF6UyRN
Forbes (2015). The
World’s Billionaires. Retrieved 25th March 2015 from, http://www.forbes.com/billionaires/list/#version:static
Jensen, M. C., & Ruback, R. S. (1983). The market for
corporate control. Journal of Financial Economics, 11(1),
5-50. doi:10.1016/0304-405X(83)90004-1
Hutchinson Whampoa (2015). Share Price. Retrieved 25th March 2015, from http://www.hutchison-whampoa.com/en/ir/share.php?cat=historical&from_dd=19&from_mm=3&from_yy=2015&to_dd=25&to_mm=3&to_yy=2015
South China Morning Post (2015). Li Ka-shing’s conglomerate agrees to HK$118 billion takeover of
Britain's O2 mobile network. Retrieved 25th March 2015, from http://www.scmp.com/lifestyle/technology/article/1746889/li-ka-shings-conglomerate-agrees-ps1025-billion-takeover
Telegraph (2014). Three
rules out O2 UK acquisition. Retrieved 25th March 2015, from http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/telecoms/10736245/Three-rules-out-O2-UK-acquisition.html
Telefonica (2015). Historic Share Price Data. Retrieved 25th March 2015, from http://www.telefonica.com/en/shareholders-investors/html/share/historico.shtml
