Deals

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

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

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

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

Then the Brexit vote happened, and the U.K., which made up 39 percent of first-half earnings before interest and taxes at Li's flagship CK Hutchison, became less of a dependable investment destination. The falling pound has dragged down profit at the conglomerate, which owns a slew of water, electricity and telecom assets in Britain. Li warned earlier this month that the fallout from Britain's decision to leave the European Union would last for years. 

Back home in Hong Kong, minority shareholders rejected a $12.4 billion all-stock bid by Cheung Kong Infrastructure for his Power Assets division, a takeover that would have tightened Li's control of a cash pile totaling more than $8 billion.

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

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

Following some concessions, CK Hutchison has been given approval to merge its 3 Italia unit with Wind Telcomunicazioni, Russian firm VimpelCom's telecom business, people familiar with the matter told Bloomberg News last week. The bigger chunk of the market that the two companies will control will enable the Italian business to lift its Ebitda margin from a paltry 18 percent, the lowest among CK Hutchison's telecom operations in Europe. By contrast, margins at the U.K. business are 41 percent. Analysts at Deutsche Bank reckon that approval for the Italian deal could raise CK Hutchison's Ebitda by as much as 8 percent. 

Fixing Italy
Ebitda margins at CK Hutchison's 3 Italia operations are the company's lowest among its European telecom operations
Source: Company report
Footnote: Data is for the first half of 2016.

CK Hutchison shares have picked up after being hammered following the Brexit vote in June, rising 21 percent as of Friday's close from this year's low on July 8. CK Property has also gained, climbing 12 percent over the same period.

On the Up
After being hit following the Brexit vote in June, Li Ka-shing's flagship companies are now rising
Soruce: Bloomberg

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

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

The billionaire's overseas bets have been largely yield plays in utilities and telecoms that are regulated and remain defensive even during a downturn. That's looking increasingly prescient at a time of negative interest rates in Europe and elsewhere, and sets Li apart from rival tycoons that remain overexposed to real estate in Hong Kong and China.

The prospect of dominating Italy's telecom market adds to the evidence that Li's bet on Europe is well founded. Superman hasn't lost his touch.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net