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:
Executive Director, Group Finance
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
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
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.
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
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
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
Articles that we have saved include the
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
Hutchison is the world's
largest port operator. And it has fast-growing retail, energy and
infrastructure operations as well.
Cover Story - CFO
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
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.
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.
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?
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
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
How has Hutchison positioned itself ahead of the expected rise in interest
rates and what direction do you expect the US dollar to go?
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.
Can you shed some light on how these holdings are managed?
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,
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.
How did this false perception come about?
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
Who manages the assets and how?
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.
What are your earnings drivers likely to be in the next six to 18 months?
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
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.
What is your outlook for the Hong Kong property market?
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.
There is a perception that you are selling off assets to manage earnings to
cover the 3G losses. Is this fair?
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.
Has the attention on 3G been overblown? Is it a distraction for you from the
vibrant parts of the business?
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.
What is the impact of 3G going forward?
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
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.
How important is China going to be?
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.
Do the putative national security concerns expressed by some US politicians
constitute a road-block to your growth there?
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.
Are you in an acquisitive mode?
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.''
Kevin Rafferty and Mark Clifford
HONG KONG 22 May 2004
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.
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."
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.
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
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.
and Singapore Technologies Telemedia (STT) jointly offered US$750
million for an estimated 70 to 80 percent stake in Global
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
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.
This deal was not approved by the US Government so STT ended up
with the deal on their own.
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.