Bottom-Fishing in the Tech Swamp

Li Ka-shing is betting big on dot-coms and 3G. Is that smart?

Li Ka-shing has long thrived on doing the unexpected. And despite the global slowdown, Hong Kong's preeminent dealmaker is at it again. Even as most investors write off e-businesses as dot-bombs and shun debt-choked telecom companies, Li's Hutchison Whampoa Ltd. (HUWHY ) is shopping for bargains in the wreckage.

Consider Li's recent moves. In early June, Hutchison nearly doubled its stake in U.S. travel e-tailer Inc. (PCLN ) to 30%. Hutch is also taking over the Asian subsidiary of Internet Capital Group, the Pennsylvania-based business-to-business e-commerce company. And Hutch is betting billions on another out-of-favor technology, the high-speed wireless Internet, or 3G. Others may have soured on telecom and the Net, but not Li. "The fundamentals haven't changed," says Canning Fok, Hutchison's managing director. "[If] others don't like it, so much the better."

Li and Fok are gambling that the investment will pay off down the road. While 3G has been delayed in Japan and elsewhere, backers believe it will be lucrative one day. If 3G works, Hutchison will have a whole new revenue stream--or a valuable asset to flip, as the company did in 1999, when it sold its Orange PCS mobile service in Europe to Mannesmann (MNNSY ) at a big profit.

BIG TABS. In the meantime, Hutchison is committing billions to build 3G networks from Sydney to Vienna. On June 19, its Australian subsidiary said it would spend more than $430 million on new equipment to build a 3G network. In Britain, where Hutchison paid $6.9 billion for a 3G license last year, it has arranged a $5 billion loan to roll out service next year. It's also looking to start up a high-speed network in Hong Kong, where it still controls the lucrative Orange name.

Li, 72, and Fok, 49, can afford to boldly go where few dare to venture. Last year, Hutchison raked in $4.3 billion in profit on revenues of $7.3 billion--half of it from asset sales. With a war chest estimated at $7 billion, Hutchison has deep pockets at a time when other telecom players are flailing. Besides, Hutchison's telecom operations account for only 13% of revenues; most of its money comes from ports, real estate, retail, and energy.

And Hutchison isn't taking chances. The financing for its British 3G effort doesn't involve any collateral from the parent's operations. That makes the loan more expensive but insulates shareholders from the vagaries of 3G. Says John M. Bailey, head of the greater China corporate ratings group for Standard & Poor's Corp., like BusinessWeek a division of The McGraw-Hill Companies: "They have shown good financial discipline in the way that they have funded the 3G project."

Small wonder Li is on the prowl for more assets while many rivals are selling theirs. In Israel, where the company controls the No. 3 cellular operator, Partner Communications (PTNR ), Fok says Hutchison is considering buying a stake in state-owned carrier Bezeq. In India, where Hutchison has 20% of the mobile market, it is teaming up with local Essar Telecom Ltd. to bid for more cellular licenses. And with its $110 million stake in Priceline (PCLN ) (purchased with sister company Cheung Kong Holdings), Hutchison plans to launch an online travel service in Asia. "The business has great potential," raves Fok, who says Priceline's U.S. operation has a turnover of more than $1 billion and will soon be in the black.

It's not all smooth sailing, though. While Hutchison managed to finance its British 3G play, it still must arrange funding for its operations in Austria, Italy, and Sweden. The tab for the Italian business alone could easily hit $5 billion, Fok concedes. And starting 3G businesses in so many different countries at once may be taxing even for Hutchison, which has limited experience in building and operating businesses on such a grand scale.

Yet Fok remains upbeat. There were many naysayers, he notes, when Hutchison moved into the cellular business. "We proved [ourselves] the last time around," he says. And it's true that Li Ka-shing has built his empire by confounding the skeptics. He and Hutchison are keen to pull off an encore.

By Bruce Einhorn with Mark L. Clifford in Hong Kong

— With assistance by Mark L Clifford

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