PRESS

SIXT GETS YOU BILLIONS

Let's bet Frank Sixt never wore a swallow-tail formal coat and top hat to his taxation and corporate-law duties at the Stikeman Eliot firm's Vancouver office. But he did at Britain's Ascot racecourse last week. And in the Royal Enclosure, too, where, as the musical My Fair Lady put it: "Ev'ry duke and earl and peer is here, ev'ryone who should be here is here."

Sixt was there because, as executive director and group finance director to Hutchison Whampoa Ltd., he's basically lord chamberlain to Hong Kong billionaire Li Ka-shing. That 200,000-employee, 52-country conglomerate's total revenues rose 13 percent to $51.46 billion in 2008 over 2007, although
total assets fell 15 percent to $110.4 billion. During 26 years of Hong Kong
residency, star money manager Sixt came to chair the Li Ka-shing Foundation and many of Hutchison Whampoa's telecommunications enterprises. He once quickly raised US $4.6 billion for entry into third-generation (3G) mobile telephony.

After joining Queen Elizabeth for "a flutter" on the Ascot nags, Sixt and wife Anne promptly left for what they and many Britons consider a safer bet -
sunshine at their place in pre-hurricane-season Barbados.  
- 2009 June 25    MALCOLM PARRY  Vancouver Sun

>> to  the South China Morning Post graphic on Hutchison Executive's Pay
[ Frank called it an invasion of his privacy! ]

 

Inside Hutch's Global empire

Hutchison Whampoa stands apart from the Hong Kong crowd.  Its HK$217 billion market cap isn't the biggest in town, but the size and scope of its global businesses is unsurpassed by any other local firm. Since Li Ka-Shing took control of the venerable British Hong 25 years ago, he's built it into one of the few Asian companies outside of Japan and South Korea that can call itself a true global competitor, employing more than 170,000 people in 40 countries.

Hutchison is the world's largest port operator. And it has fast-growing retail, energy and infrastructure operations as well.

 


At Ascot - 2009 June 18

There are not many minds in this world that operate at such a high level on many fronts but Asia's richest billionaire Li Ka-Shing currently has Frank Sixt at Hutchison Whampoa as Group Finance Director.  Frank Sixt is The Brains behind these incredible transactions:

BRAINS TRUST

Frank Sixt

Executive Director, Group Finance Director, 
Hutchison Whampoa Limited

Effectively this genius ( he composes music scores as well as having designed the Skype phone) heads up "Brains Trust"  of one of the world largest multi-nationals.    You can't take up too much of his time when you know that ceo's in 54 countries report to him and the groups payroll exceeds now 220,000 globally.

Frank Sixt is an Executive Director and Group Finance Director of Hutchison Whampoa Limited, one of the world's largest conglomerate. 

He is chairs the Li-Ka-Shing Foundation, TOM Group and TOM Online Inc., an executive director of Cheung Kong Infrastructure, Hutchison Global Communications and Hongkong Electric as well as a director of Cheung Kong, Hutchison Telecommunications International Limited, Hutchison Telecommunications (Australia) Limited, Partner Communications and Husky Energy. 

Mr. Sixt was formerly a senior partner of the law firm, Stikeman Elliott in Canada specializing in taxation and corporate law. Born in Montreal, Quebec in 1951, Mr. Sixt obtained a Bachelor's degree in Arts in 1972, and a Master's degree in Arts from McGill University and a Bachelor's degree in Civil Law in 1978 from University of Montreal, and is a member of the Bar and of the Law Society of the Provinces of Quebec and Ontario, Canada.

He has been resident in Hong Kong since 1983, and is married with a son.


What makes Frank Sixt unique in the business world is not just his savvy in global deal-making and strategic tax planning but also his ability to Think Outside The Box as with his recent  "changing the business model" approach to telecom service in the UK  with that now familiar phrase, " Leaving the Walled Garden Behind Us" with launch of X-series in UK in November 2006.  

He is applauded by critics as well as his supporters for his passionate yet intelligent and human approach.


Looking back, Frank Sixt's real intelligence surfaced when he was referred to in a 2002 press piece as "Asia's saviest borrower".   " Perhaps it is his legal background which makes him so diffident about building up a public persona. A practising lawyer, he joined the board at Hutchison in 1991 when he found that he was beginning to participate in the business decisions of the group rather than just offering legal advice. He comments: "By the time I joined the group almost all my time was spent on their [Hutchison] projects. I had, in effect, a single client practice. Key people in the group had also become good friends, so it was a very easy transition to life in the group."1

Frank Sixt's brilliance on the international stage came to light when he raised $4.6 billion USD in a down market for the group's entry into 3G.    His skills confirmed beyond just an Asian Equity strategist.   Frank Sixt is a 'Value Creator' in addition to having a rolodex that spans to the heads of CEO's on five continents.     There are just a handful of such professional money managers who have such reach, and who can grow corporate empires.  

He is in high demand as speaker:

and sat on the board of Wellsford Real Estate Trust in New York, which was subsequently purchased by Sam Zell.    In other words, he is far-sighted.

 Footnotes:
1   Jamie Ivey   - http://goliath.ecnext.com/coms2/gi_0198-102529/Low-profile-Hutchison-CFO-breaks.html


The genius of Frank Sixt is not really understood until one notes that his first love is song writing.   He was Quebec's Jeunesse Musical Musician of the year at the age of 13.   He graduated with his Masters degree by the age of 21 and one of his first assignments after graduating from Law School was to write the master business plan for Husky Oil in Canada which continues to be one of Li Ka-Shing's best performing assets.    


   
>> 
CFO Asia article at end of this page in its entirey
One of the world's best business strategists and best performing money managers in the world is also one of this planet's best human beings as many of his fans around the world will attest.  Our multi-talented friend is the Group Finance Director of one of the world's largest conglomerates who splits his time between Hong Kong and London.     

Asia's richest billionaire Li Ka-Shing has Frank Sixt at Hutchison Whampoa to watch over his complex investment empire which spans 52 countries and over 200,000 employees.    He's just  finished strategising and negotiating India's largest corporate takeover battle - and achieved for the group a $9.6 billion USD profit for the group's telco joint ventue in India, one of today's 'sexiest' investments markets and genre.

We've saved a few articles where our good friend Frank is featured and Tai Tai is most proud that he was one of our first and most committed supporters when we started this blog from New York in 1999.   He continues to be a visionary and occasionally is a guest at our home and we have been the beneficiary of his magnanimous generosity in London and in Hong Kong and various places in North America.   

Articles that we have saved include the following:

Inside Hutch's Global empire

Hutchison Whampoa stands apart from the Hong Kong crowd.  Its HK$217 billion market cap isn't the biggest in town, but the size and scope of its global businesses is unsurpassed by any other local firm. Since Li Ka-Shing took control of the venerable British Hong 25 years ago, he's built it into one of the few Asian companies outside of Japan and South Korea that can call itself a true global competitor, employing more than 170,000 people in 40 countries.

Hutchison is the world's largest port operator. And it has fast-growing retail, energy and infrastructure operations as well.

But it's Hutchison's forays into leading-edge - cynics would say bleeding-edge - 3G telecommunications that have been the focus of investor attention in recent years.

Since selling off its European cellular assets for a staggering US$20.5 billion (HK$159.9 billion) profit at the height of the telecom boom, Hutchison has spent most of those profits in its 3G telecoms businesses.

But yesterday Hutch received something of an initial payback when the shares had their biggest one-day gain in five months, climbing by 4.3 per cent to HK$51. The main reason for the rise was that the giant announced it had 1.73 million subscribers to its 3G services, a rise of two thirds in two months and ahead of many analysts' forecasts.

But telecoms are a relatively small part of the Hutchison story, says chief financial officer Frank Sixt. It is ports that produce the biggest returns - HK$7.6 billion in profits (before interest and taxes) last year, up 15 per cent.

Retail businesses saw profits before interest and taxes more than double, to HK$2.3 billion, propelled by earnings from the European Kruidvat retail chain.

Except for 3G, all of Hutchison's operating businesses produced healthy double-digit growth of the sort that would be the envy of most CFOs.

Sixt and group treasurer KS Chan have been producing some pretty hefty returns as well - HK$6.25 billion on treasury operations last year, up marginally from the year before. It's an achievement that's all the more impressive coming at a time of the lowest interest rates in a generation.

Hutchison has traditionally been a reticent, its critics say opaque or even worse, company. But Sixt says that a new era is dawning. The problems at Enron and WorldCom are less of a spur than the nasty shocks recently from Shell, a company that was considered beyond reproach until it was found to be fiddling its numbers on oil and gas reserves. With investors skittish about everyone, Asian conglomerates included, Sixt feels that it is time to dispel many of the myths surrounding the company.

In the questions and answers that follow, Sixt addresses the question of how the company manages its massive HK$112 billion cash hoard - conservatively, with no derivatives and no leverage - and how it is positioning itself for a rise in global interest rates. He defends the company's bet on 3G, reiterating earlier statements on the level of capital spending and promising that 3G operations will break even on an operating basis by the end of next year.

That, in turn will see the company start paying down its debt, a strategy that Sixt thinks is well-suited to the higher interest rates he sees coming - though rate hikes, he believes, won't happen as quickly as most analysts expect.

Q: By far the biggest contributor to your profits last year after ports was finance and investment. Is it going to be as important as a profit contributor this year?

A: We are in a different interest rate environment.

It goes without saying that if you are managing liquidity with a view to preservation of capital, availability of liquidity resources as required by the company, and only lastly yield - because we are not fund managers, we are treasury managers - then when you looking at a rising interest rate environment, the opportunities to produce a yield that is better than clipping coupons on the various maturities that you hold is less than in a declining interest rate environment, so I would not expect the earnings contribution to go up by reason of performance from the treasury division if we do indeed move to an environment of secularly rising interest rates in US dollars. We are principally a US dollar-denominated issuer.

As we move towards break-even and profitability in our 3G businesses, it will be very natural for this company to embark on a process of reducing debt and absolute liquidity levels.

That will mean that in return terms in a rising interest rate environment, it will be a positive thing; but in absolute dollar terms the contribution of the division can be expected to go down if the level of liquidity is reducing over the next few years.

Q: How has Hutchison positioned itself ahead of the expected rise in interest rates and what direction do you expect the US dollar to go?

A: Our response has been tactical - for example taking some profits on longer duration components of our bond exposure and maintaining short duration exposure in bond portfolios (currently 3.5 years) during the first quarter.

We have also moved to an overweight cash and money market securities at the very short end of the curve and are underweight bonds compared to last year.

On the liability side, we are closely monitoring interest rate hedges against long-term fixed-rate borrowings - we will consider making tactical changes opportunistically during the year.

At this hour, I believe the rate at which accommodation in the US is removed may not be as rapid as some expect due to the risks to both the US and global economies, which could arise from excessive or premature fiscal or monetary tightening.

From a currency point of view, we are keeping a sharp weather eye to our expected euro expenditures over the coming two years.

Q: Can you shed some light on how these holdings are managed?

A: I'm glad you asked this. From time to time I see some very poorly informed comment on this aspect of our business - for example recent suggestions from an analyst that our treasury operations are somehow similar to a hedge fund.

That is not the case. We don't consider ourselves to be asset managers, but custodians and managers of liquidity as part of the business of a conglomerate, very different from trying to be a fund manager.

Firstly, there is no leverage in any assets managed by the treasury group. Second, all of our cash and marketable securities are primary instruments - i.e., money-market or fixed-income securities - and there are no derivatives or hybrids.

Finally, we have less than 5 per cent currently in equities. That won't change. You could argue that, in a rising interest rate environment, it would make sense to change the asset-class allocation and have a heavier allocation towards equities. If we were a fund manager, yes. But as a treasurer and manager of liquidity, absolutely not.

So we are rather far from being a hedge fund. Frankly, we do not even view our job to be good asset managers. Our job is to preserve and manage liquidity, so our mandate is first, preservation of capital; second, management of duration so as to match the company's liquidity requirements; and third, and last, yield.

Q: How did this false perception come about?

A: We live in times where many people have been disappointed in entities that they did not expect. I am not thinking just of the likes of Enron and Global Crossing, but more recently of Shell oil. In situations like this, you get a high degree of speculation, and it is our job to calm those fears and differentiate Hutchison from those kinds of concerns.

We are trying to be more proactive, especially in the fixed-income community, since we are major issuers of debt into the US dollar capital markets, but also on the equity side.

Q: Who manages the assets and how?

A: The bond portfolios, money market and cash portfolios are managed by myself, KS Chan our treasurer, and by our teams of about 20 people plus administrative support in Hong Kong and Europe. To mitigate risk and as an excess of caution given the scale of things, we manage all our own settlement as well as third-party custodial arrangements directly.

We use 10 to 12 outside advisers, principally the asset management arms of major international banks, to create a ``fund of fund'' approach to managing fixed-income investments. We, of course, have credit rating and concentration rules: currently, all money market positions are credit rating weighted with minimum A1-P1 credit quality.

Our bond portfolio has a weighted average credit quality of ``AA''. We are overweight sovereigns and supra-nationals. The one rule that has served us best is that we do not hold paper in any corporate in sectors in which we have direct business exposure, such as energy or telecommunications.

There will be no fundamental change in our approach regardless of interest rate directions.

Q: What are your earnings drivers likely to be in the next six to 18 months?

A: As our 3G businesses move towards Ebidta, cash flow and earnings break-even, our consolidated earnings will of course reflect start-up losses, particularly this year and in 2005. We believe that we will be in the Ebitda and cash-flow break-even in late 2005 and 2006, leading to an earnings break-even pushing a few months behind that.

Although these attract much attention, as ``start-up losses'' in 3G, I see them simply as a part of our investment in building those businesses [rather] than as operating losses in a conventional sense.

So when you ask about earnings drivers, I focus on the earnings from our established businesses, all of the businesses which are not in the course of being built from the ground up and not generating start-up losses.

Here the outlook and prognosis is pretty good: before exceptional items and 3G start-up losses, our established businesses reported an increase in Ebit of over 20 per cent - to HK$29.5 billion or US$3.8 billion last year.

Within that, we had really solid growth performances across the board. Our ports division, a better-than-US$1-billion contributor, was up 15 per cent, our energy businesses by 28 per cent, our property businesses by 19 per cent, our retail businesses by over 100 per cent and our telecom businesses by over 20 per cent.

These businesses have all continued to perform well in the first half and we have been meeting or exceeding our budgets in all of our divisions, so far this year. Barring secular events affecting global trade, energy commodity prices or consumer spending, all have good prospects for the year.

There is a good mix among these established businesses, with ports representing 25 per cent of earnings in 2003, energy and infrastructure 29 per cent, property 10 per cent, retail 8 per cent and telecoms 4 per cent. There is also a fairly broad geographic reach, with 59 per cent of our earnings coming from outside Hong Kong and China in 2003 and 54 per cent split between Europe and North America. We benefit from a stabilizing effect from diversification of the businesses both in geographic and sector terms. It is a rare thing when all of the drivers in all of the places in all of the sectors we are in are going either all in a positive direction or all in a negative direction at the same time.

Q: What is your outlook for the Hong Kong property market?

A: HWL has not acquired substantial development land bank in Hong Kong since 1998 and as a result is a relatively small player in development in Hong Kong - more than 60 per cent of the division's earnings comes from our investment property portfolio and the balance from modest development activities in the mainland and our operating hotels around the world.

Q: There is a perception that you are selling off assets to manage earnings to cover the 3G losses. Is this fair?

A: This is absolutely false. The cash and marketable securities we talked about at the beginning of this interview totalled at year-end 2003, US$18.4 billion after repaying exchangeable bonds and purchasing the UK 3G debt.

If you look at our debt profile, 70 per cent of it is due in 2008 or later. So when I see someone write that we are selling assets to ``fund'' 3G losses, well, I just don't understand how anyone with any business sense could think that. And as to earnings, well, as I say, to understand Hutchison well, it is important to look separately at 3G start-up losses - which are simply part of our total investment in 3G - and earnings from our established businesses, which are a proper measure of their performance and value. It would never make sense to sell one to ``cover'' the other.

No, it is simply that some of our assets - our interest in P&G is a perfect example here - have reached the point in the cycle where selling is better value for our shareholders than holding. This always happens in a diversified conglomerate. We have realised extraordinary gains from asset sales in the past, we have realised some this year, and if we are doing our jobs, we will realise more in the future.

All of this started with a decision to sell cellular businesses in 1999, 2000 and 2001, after which, when the dust had settled and our treasury operations had liquidated all of the non-cash considerations, we netted US$20.5 billion. That has anchored the high-level of investments in 3G and the very significant investment in ports and retail since 2000.

We are building 3G businesses consciously over a minimum five-year start-up period from 2000 through to our year-end Ebitda break-even target in 2005.

If you take a quarter or even a half within that period, you don't get the right perception. The other thing is that the numbers are big, a function of the starting point being big. We sold US$20.5 billion, and if we are good managers, the idea is to build a lot more than US$20 billion of businesses out of that.

Q: Has the attention on 3G been overblown? Is it a distraction for you from the vibrant parts of the business?

A: Definitely. This company and its associates employ 170,000 people in 40 countries. Fewer than 10,000 of them are employed in 3G. The other 160,000 in 2003 produced turnover of close to US$18.5 billion, a 31 per cent increase; Ebitda of US$5.8 billion, a 29 per cent increase; and Ebit of US$3.8 billion, a 20 per cent increase. The focus on 3G has, at a minimum, obscured a very strong growth story for a company of our size.

Q: What is the impact of 3G going forward?

A: I expect our remaining investment in 3G projects after 2003 and up to break-even will be in the 6-6.5 billion euros (HK$55.8 billion-HK$60.5 billion) range. Of that, 3.8 billion euros is funded by available borrowings, 300 million euros by minorities, so the call on Hutchison resources going forward should be less than 2.5 billion euros. I think you would agree that is a pretty small impact for a company our size going forward.

Of course, going forward, 3G will represent better than 30 per cent of our assets. I believe the return on those assets will, in the end, be as good or better than returns from the rest of our businesses.

If we didn't believe that we wouldn't have invested in these businesses in the first place. I don't want to put any targets out there for the return on 3G assets. There have been so many commentaries. But obviously the return should be equivalent to the overall return on capital for this group.

Q: How important is China going to be?

A: Today, about 7 per cent of our assets and 14 per cent of our earnings are in the mainland. It offers continuing opportunity for our ports division, our energy division, and increasingly for our retail and property divisions, as well as in media and telecom through our Hong Kong businesses and our associates Tom Group and Tom OnLine.

The ParknShop superstore model has found quite good traction in southern China, and the property division has been involved in several successful residential and commercial projects, although this is small relative to the Hutchison earnings base.

We are quite well positioned in terms of the types of business we are in, and more doors are open to us as time has gone by, so in a favourable growth environment, China becomes more of a driver. In terms of hard or soft landing, I don't have a view, other than it is generally not correct that the sky is falling, and an awareness of the issue is a very large part of moving towards a resolution of the issue. We should not see a significant interruption either in terms of growth or well-being.

Q: Do the putative national security concerns expressed by some US politicians constitute a road-block to your growth there?

A: Frankly, I think in the late 90s Hutchison got caught up in partisan politics in the US ranging from policy towards China to campaign contributions, even though in fact we had no part in either. We are continuing to work to make sure that people understand that Hutchison is not a political entity.

It is just a multinational that happens to be based in Hong Kong, which is a great place to be based.

In particular, our ports group is a leader in the global effort to secure container transportation against the risk of terrorism.

This has put us in very close working relationships with national security officials around the world, and in particular in the US. I believe we are viewed by them not as a prospective threat or risk, but as solid partners in the effort.

So if the right opportunity arose tomorrow in the US, I wouldn't assume that there would necessarily be any political or security bar to our pursuing it.

Q: Are you in an acquisitive mode?

A: We are always looking for opportunities in each of our five core business areas. Obviously in telecommunications, we have a very full agenda and have not taken on more exposure, for example, to 3G assets, simply because we did not want anyone to think that we were risking indigestion.

In our ports division we have had a very substantial growth period in 2002 and 2003. There we are always looking for the next opportunity, but there are very few M&A targets of scale.

We are in five out of the top eight ports in the world, and of the top five, the only one we are not in is Singapore.

Husky Energy has expanded very substantially though M&A activity since the merger transaction with Renaissance that took it public in 2002 and still has appetites, but is always conscious of financial and fiscal prudence. Is it time to sell energy assets? Today, our chairman in answer to the question simply said: ``No.'' WEEKEND STANDARD     By Kevin Rafferty and Mark Clifford   HONG KONG  22 May 2004 



     Cover Story - CFO ASIA 

SIXT SENSE
Hutchison's CFO Frank Sixt is about to roll the dice on the biggest corporate gamble in Asia. He just might win.

Frank Sixt believes in 3G. Really - he does. And not just believes, but bubbles. He says this of videophones, which he expects will be 3G's main consumer hook: "The first time that I used the p2p (peer to peer) video application, I just found it astonishing. I was overwhelmed by that experience." And this is not the effusion of a misty-eyed entrepreneur, but the elan of a gamesman who can look the full risk of 3G square in the eye and still back his horse.

A little faith helps, because as gambles go, this is one of the world's biggest. 3G, standing for third generation, promises to be the technology that lets consumers download high-speed multimedia - voice and video - onto their mobile phones. And Sixt is the CFO of Hutchison Whampoa, the US$32 billion (net assets) giant that no one in Asia can afford to ignore. He is betting the horse, not to mention the company. And for the first time he has spoken at length to a financial magazine about his - and his boss Li Ka-shing's - rationale for the investment.

It's no wonder why he's opened up now. Hutch is launching 3G operations in Hong Kong, the UK and Italy this summer. It has spent US$10.2 billion on seven spectrum licenses (five in Europe, plus Australia and Hong Kong) and it has further interests that reach as far as Paraguay and Israel. Lehman Brothers analyst Phil Tulk estimates the company's total exposure - proportional equity plus debt - will be US$15 billion for the next five years on its European 3G operations alone.

Hutchison, controlled by Hong Kong magnate Li Ka-shing, is taking this gamble on the back of an old-economy property company, which has been cosseted by the Hong Kong government's protectionist policy toward the real estate industry. Profits, in other words, have rarely been a problem. In fiscal 2000, for example, the company reported a robust US$4.4 billion in profits on top of US$7.3 billion of turnover. Hutch owns ports in Korea, Hong Kong and China, an oil company in Canada, real estate all over the world, retail food chains and hotels. It expanded into telecommunications in the early 1980s, making many stops and starts. Now chairman Li and CFO Sixt will lean on the companies developed along the earlier evolutionary tree of its businesses to fund its 3G uberbusiness. They feel it's worth the risk, according to Sixt, because Hutch's comparatively conservative balance sheet allows it to grab this market while competitors in Europe are on the ropes. And they believe in the technology.

The NAVigator
Pause for a second and mull what it means if Li and Sixt are right. They will have succeeded in the last remaining technology gambit still in play in world finance, and they will be dominant in Europe. Hutch, remember, is a Chinese company - its chairman's connections with Beijing are legion - and it can either spin off the 3G assets or use the proceeds to develop 3G closer to home, in perhaps the greatest growth market for technology of all - China. The rewards, of course, will be great for shareholders - Li and minorities alike. Equally important, Hutch will have transformed itself from a traditional, asset-based conglomerate into a technology firm with much of its income stemming from the sale of information. Hutch will, after all, own the delivery channels for the data. Remember when Japan's companies offered business models to the rest of the world? Count on hearing the same about Hutch if the game goes their way.

But the risk is huge. Some 37 percent of Hutch's net asset value (NAV) is now tied up in telecommunications, largely 3G. This vulnerable slice is weighing on the stock price, down about one-third over the past year, and is the reason the stock is trading at a 2.8 percent discount to NAV. Within that discount abides a horde of nagging doubts. No one knows the costs involved in maintaining the enterprise, or whether Hutch will be able to spin off its 3G assets in an initial public offering. No one knows the timing or size of Hutch's various 3G revenue streams. No one even knows whether the technology works or if consumers want it. And Sixt, universally regarded as a wizard with numbers, told CFO Asia he doesn't know how he will amortize the billions in spectrum purchases that Hutch made in Europe for 3G. But make no mistake. Hutchison will rise or fall on the commercial success of this technology. Says Julian Mayo, managing director of the investment house iRegent: "If you don't believe in 3G, you shouldn't hold [Hutchison] stock."

Few have the guts to say Hutch can't do it. A certain portion of analysts and investors believe that there's magic - a kind of sixth sense for business - in Li Ka-shing's boardroom. It has a talent for making telecom investments and pulling out billions. It converted a US$1.5 billion investment in Orange Plc, a UK mobile operator that it built from scratch, into about US$20 billion in trading gains. It likewise reported US$9 billion in profit from the sale of its stake in the US wireless operator VoiceStream (to Deutsche Telekom, in 2001). And it famously backed away from the German 3G auction in the summer of 2000, sensing that the price tag had gone insanely high.

But not all Hutch deals smack of such sagacity. In the excitement over Hutch's recent bid for the telecom assets of bankrupt Global Crossing, many have overlooked Hutch's likely US$400 million write-off on a convertible bond it holds on Global Crossing (see box).

All of this is on Frank Sixt's plate. The man in charge of Li's big bet is a modest, enthusiastic and razor-sharp tax lawyer, with a creative streak that belies the dryness of the profession.

Until recently, Sixt kept up his membership in the Canadian songwriters guild, left over from an early stab at a career as a tunesmith. (He penned a torch song called Heartaches that was used for a 1981 movie starring Margot Kidder.) He arrived in Hong Kong from Toronto in 1983 and practiced law for the Canadian firm Stikeman Elliot until he joined Hutchison. Eventually he won the trust of Hong Kong's canniest investor, first as an attorney and then as a financial executive.

From his office in Hong Kong's Hutchison House, he straddles two worlds. Hutchison is an old British hong, and its boardroom - all wooden panelling, subdued lighting and leather-bound antique books - has the clubby, colonial look of a Pall Mall gentleman's establishment. Yet the company is now chaired by a Hong Kong local. Not just any local - KS Li is the territory's richest and most savvy businessman, and he boasts connections that reach deep into the Beijing politburo. Although a publicly listed company, Li's control of Hutch is so absolute that it is criticized, widely, for lacking accountability. But - if not totally au fait with the investor fashion for transparency and disclosure - there is no doubting that this is a modern firm with shrewd financial sense. For example, it pulled off the biggest block trade ever when Hutch sold US$5 billion of its Vodafone stock in March 2000. This well-timed sell-down in the wireless sector anticipated the broad TMT market collapse.

Sixt is confident Hutch can parlay equal savvy into its 3G investment. Where Hutch has been different, Sixt says, is in how it has finessed the risk of 3G. Hutch's telecommunications assets, including 3G, represent 22 percent of the company's total. Sixt is counting on that 22 percent as a "growth base" (the telecoms assets contributed 6 percent to earnings last year).

The remaining three-quarters are all earning, performing assets, he reminds us. Its competitors in 3G - Deutsche Telekom, British Telecom and Vodafone - have no such cushion. These second-generation operators bought into 3G licenses to build businesses off the back of their 2G earnings. But they have dramatically encumbered their cash flow to finance the growth into 3G, and their options are limited.

Hutchison is in a much more healthy position. Thanks to its cushy property business and remarkably well-timed and profitable trades in the wireless sector, it has enough retained earnings to comfortably finance its 3G gambit. So, Sixt takes pains to say, unlike its 3G peers, Hutch has not risked everything on the technology.

"Hutchison, by design, has not done that," says Sixt. "We will not reinvest significantly more [in 3G] than the value that has been derived from the telecoms division itself. None of this growth will be financed by having put at risk, or having leveraged in any way, off the back of the rest of the conglomerate."

But saying an investment won't bankrupt a company is different from saying it will be profitable. And not profitable in the sense of some breathless reckoning of a wireless utopia, but profitable in a CFO's ultra-conservative, discounted cash flow sense. Even the most expert and analytic stumble here. Tulk says there is an economic argument generally for 3G, based on his DCF model. But when asked what numbers he bases these projections on, he says: "Lots of willy-nilly things."

Amortize This
And when Sixt is asked how might Hutch handle basic issues such as the amortization treatment of its license costs and customer acquisition costs, he answers: "I actually don't know."

One might pause here to consider the full implications of that. The CFO, the custodian of the finances of one of Asia's biggest conglomerates, has not decided how it will amortize its billions in expenditures in its biggest area of investment. Third-generation wireless is just too nebulous, too unknowable to make such a precise commitment of numbers.

With many of the largest companies around the world being hit by investor fears of hazy accounting in the wake of Enron, Sixt needs to address this matter. The Hutchison 2000 annual report makes passing reference to this amortization issue, saying that "3G license costs are capitalized at cost and amortized over the periods of the licenses from the date of commencement of commercial operations."

Of course, the questions become what is the life of the license, and what is the date of commencement of commercial operations? DoCoMo didn't have such a precise starting date. It eased into UMTS, one standard of third generation technology, beginning with a trial group of about 4,500 users, and then slowly expanded into something properly 'commercial' as technology permitted a wider rollout.

Sixt's numbers are likewise lost in the fog of 3G. For example, he says Hutchison's Italian 3G license, for which it paid US$2.7 billion, "has just been extended from 15 to 20 years [and] we are still discussing the starting point for the extension." So the beginning and end point of this amortization period cannot be decided and cannot be fully accounted for as yet.

Then there is the other matter of Hutchison's P&L. The company has historically reported steady profit growth - its principal earners, its ports and energy properties, are not known for gyrating income streams. Shareholders have also benefited from a series of extraordinary gains off of telecom sales. For example, in 1999, the company booked an anabolic US$15 billion net profit following the disposal of Orange. And then, in 2000, it reported a further US$4.3 billion in gains, likewise related to the sale of various wireless assets.

Now analysts say Hutchison's 3G build could put the firm, operationally at least, into loss. Lehman Brothers research estimates that its European 3G operations alone, when accounting for interest, depreciation and amortization, will lose US$443 million in 2002, and US$891 million in 2003.

Sixt counters qualms over possible shortfalls by pointing out that the company has billions of trading profits 'in the bag' ready to offset any such bleed. For example, in May 2000 Hutchison bought a UK 3G license for US$6.3 billion, and then sold 35 percent of that license to Dutch-based KPN and to Japan's DoCoMo in a transaction valued at US$8.5 billion. Hutchison still has about US$1.4 billion in retained earnings from that transaction, which it intends to use to offset losses in its UK operations through to 2003.

Investment bank Salomon Smith Barney in Hong Kong reports further that Hutchison's interests in Vodafone and Deutsche Telekom are trading at about US$1 billion above book, and that the company could use these numbers to reduce reported losses in 2002.

All well and good. But again, the broader concern for investors is that Hutchison, for a number of years upcoming, will be largely plucking its earnings figures out of thin air. What profit the company will report in 2002 to 2005 will depend on Sixt's accounting treatment - how he will amortize the firm's 3G expenditures and to what extent he will offset losses from previous trading gains.

"Hutchison has been aggressive in its accounting. For instance, it will take losses up front, so there is scope to offset massive losses," says Edmund Harriss, a portfolio manager at Investec Asset Management. "There is enormous scope for Hutchison to apply perfectly acceptable accounting rules but to engineer all sorts of outcomes," he adds.

Speed Trap
Meanwhile, there are plenty who don't believe 3G will add up to anything at all. Bill Rojas, co-author of A Brave New Unwired World and contributing analyst for the telecoms consultancy Pyramid Research, labels the technology a "scam". He hones in on the application about which Sixt waxes so euphoric: the videophone. "Three-G cannot offer a videophone ... A videophone would require a transmission of 1 megabit per second [mbps], upload and download. The cell can't handle it," says Rojas, saying that UMTS base stations can only manage 4 to 5 mbps capacity, limiting usage to four or five users per base station.

The issue, as it is framed by Rojas, hinges on transmission speed. Sixt says Hutch's service will transmit at "64 kbps (kilobits per second) on the uplink (the speed at which the handset transmits data) and 383 kbps on the download, at a minimum, at full mobility." Whether that is fast enough for a decent video service depends on who you ask, but it bears looking at how NTT DoCoMo's 3G experiment has fared.

The Japanese telco (and Hutchison partner) launched the world's first UMTS network in May 2001. It has not lived up to expectations, says investment bank CSFB conglomerates analyst Joanne Wong in Hong Kong. According to Tokyo-based specialists that Wong has spoken to, the DoCoMo 3G has excellent voice quality but is riddled with bugs, has poor coverage in its central Tokyo service area and has only about one-third of subscribers that it forecasted.

Perhaps more relevant to Hutchison is the quality of DoCoMo's wireless video. DoCoMo's 3G transmits at about 100 kbps on download. For that users - or the few that have one of a small number of video-enabled handsets - get a jerky, grainy image.

It is user experiences such as these - plus those old 3G bugbears: handset supply, network engineering mystifications ("It is rocket science," says one analyst) - that have everyone, including the most 3G-hopeful such as Vodafone, Qualcomm, British Telecom, Japan Telecom and South Korea Telecom warning of delayed UMTS operations. Everyone, that is, except for Hutchison, which has never wavered from its promised second-half rollout.

That Vision Thing
In the end, what may matter most is how Sixt leverages Hutch's most valuable intangible asset - investor confidence in management's judgment - to get through the uncertainty before the performance of 3G becomes clear. With so much of Hutch's asset-base at stake, Sixt is under pressure to deal with an old problem: improve Hutchison's disclosure.

The Asian Wall Street Journal went as far as to compare Hutchison to Enron, claiming in mid-February that Hutchison "sweeps billions in contingent liabilities under the rug."

At issue was about US$13 billion in contingent liabilities detailed in Hutch's 2000 annual report, which the Journal complains is not sufficiently explained. "We know that Enron had way more debt than was reflected on its balance sheet, but what about Hutchison?" it asks.

Sixt calls any Enron comparison "outrageous" and notes that US$12.3 billion of these liabilities are fully reported on Hutchison's balance sheet. The other US$700-odd million of contingent liabilities - which are not explained but could be something as simple as warranties extended on company goods - do not belong on the consolidated accounts. Says Sixt: "There is no way that (Hutchison chairman) KS Li is going to reward me for sticking losses off the balance sheet, or liabilities off the balance sheet, or for trying to hide something from shareholders, because he is one."

But Hutchison is guilty of the Journal's broader charge that it does not give enough detail to explain its complicated finances. Although Hutchison's annual report ranks as one of the best in Asia, investors and analysts want more. When asked to rate the company's investor relations, one analyst joked: "It's improving - at a prehistoric rate." Of all the senior management at Hutchison, Sixt is seen as the most progressive and most in favor of improved disclosure. And one happy outcome of Hutchison's 3G efforts is that the company will be working harder to explain itself. Says Sixt: "We will be doing everything we can to make sure that the performance of our investments in the telecommunications division will be fully understood."

Investors confirm that Hutchison is getting more transparent, and the company retains the enormous faith of this community. Even after a difficult 2001, in which Hutch's share price fell about 22 percent (it almost perfectly tracked the declines in the Hang Seng Index), it continues to trade at a 30 times PE multiple. This is double or triple that of the best of its regional peers.

And, upcoming, if the company finds success with its many 3G ventures, it will once again be praised for its brilliance of strategy, vision and timing. But 3G's murkiness - both as a technology and as a commercial venture - and the fact that it will drain billions from Hutchison in the near term, might soon make Hutchison like all the others: scrambling to explain itself to a skeptical investor audience. Sixt, in his modernizing way, may just be anticipating Hutch's future. - Jasper Moiseiwitsch is a contributing editor at CFO Asia based in Hong Kong   March 2002
Global Crossing: Steal or Squeal?

When Hutchison Whampoa announced in late January that it had made a bid for Global Crossing, a bankrupt builder of fiber-optic networks, investors cheered. Hutchison was offering US$375 million for about a third in a company with US$22 billion in reported assets.

Specifically, Hutchison and Singapore Technologies Telemedia (STT) jointly offered US$750 million for an estimated 70 to 80 percent stake in Global Crossing.

Investors took Hutchison's share price - which had been having a rare, off year - up HK$3 as news of the deal came out. It looked as if Hutchison would be acquiring, at a bargain price, assets for which Global Crossing went US$12.3 billion into debt (hence its bankruptcy proceedings).

But somewhat lost in the talk was the fact that Global Crossing's bankruptcy has sealed the fate on a US$400 million convertible bond (CB) Hutchison holds on the company. Hutchison acquired the CB in November 1999 in exchange for assets it injected into Hutchison Global Crossing, which is about one-third owned by Global Crossing. As an equity instrument, the convertible is certain to be written off however Global Crossing emerges from its proceedings. Says Phil Tulk, a conglomerates analyst at Lehman Brothers: "Hutchison will need to write off that US$400 million which is 30-odd percent of this year's earnings. So it's a big write-down."

So Hutchison makes a clunker of an investment, loses US$400 million, offers to put in another US$375 million, and sees its share price go up 4 percent. That's the kind of leeway investors are prepared to give Hutchison. It has been such a star trader, particularly in the new economy sector, that its backers are prepared to overlook the past bad deals and expect the best on all current ones.

The deal needs to get various levels of creditor approval, which might take as long as until September to work out. It is far from certain that the Hutch-STT offer will survive this process intact. There are already early, ominous reports that some of the bigger debt holders - who might have to take a 90 percent haircut - are resisting. Hutchison group finance director Frank Sixt says the deal segues neatly into the firm's much highlighted 3G ambitions. Specifically, it will be the global backbone for its many emerging mobile properties. Cellular data flies through the air when it goes from handset to base station, but from there it travels by wire - or exactly the type of networks that are owned and operated by Global Crossing. Out of the frying pan, into the mire.

Note:  This deal was not approved by the US Government so STT ended up with the deal on their own.  

Frank Sixt is one of the most successful money managers in the world and a man of solid integrity.   We are most proud to be his cheerleader and advisor.   His personal story as Quebec's top musician as a youngster, and going to university at 13 or doing his law degree in French is another story that makes Frank Sixt a unique and meaningful individual.     The world would be more fun to work in with humanitarians and successful individuals like Frank.    He is multi-talented as well as worldly and kind.   He also has a rolodex that reaches to five continents and deals with the world's 'most powerful'.    He also wrote two musical scores for the movie "Bethune".   His network of fans and following around the world is plentiful.

 


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