Is Li Ka-shing Spending Smart Money?

The Hong Kong dealmaker is buying up tech wreckage

Li Ka-shing has long thrived on doing the unexpected. And as the global slowdown takes its toll on countries and companies, 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. His bet is that once the shakeout in those industries ends, Hutchison will be positioned to reap the rewards.

Consider Li's recent moves. In early June, his $44 billion group nearly doubled its stake in U.S. travel e-tailer Inc. (PCLN ) to 30%. Li is also taking over the Asian subsidiary of Internet Capital Group, the Pennsylvania-based business-to-business e-commerce company. Hutch is also deepening its commitment to 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] other people don't like it, so much the better for us."

BIG EDGE. 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 European Orange PCS mobile service to Mannesmann at a big profit.

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. And this year is looking good, too, thanks to the $3.85 billion return Hutchison earned from the sale of its 22% stake in U.S. cellular operator Voice-Stream Wireless Corp. to Deutsche Telekom. With a war chest estimated at $7 billion, Hutchison has deep pockets at a time when other telecom players are choking on debt.

Li has another big edge over such rivals as Vodafone Group PLC and Deutsche Telekom. Hutchison's telecom operations account for only 13% of revenues; most of its money comes from ports, real estate, retail, and energy. So while Vodafone's stock has plunged 47% in the last 12 months, Hutchison has fallen just 17%. "The balance sheets of the others look horrible in comparison," says Robert Sassoon, research chief at SG Securities in Hong Kong.

And Hutchison isn't taking chances. It managed to arrange financing for its British 3G effort without pledging any collateral from the parent's operations. That makes the loan more expensive but helps to insulate shareholders from the vagaries of 3G. In May, Standard & Poor's Corp. improved Hutchison's corporate outlook from negative to neutral as a result. "They have shown good financial discipline in the way that they have funded the 3G project," says John M. Bailey, head of the Greater China corporate ratings group for S&P, like BusinessWeek a division of The McGraw-Hill Companies. "They have a strong cash position, strong financial flexibility, and a strong revenue stream."

That's why 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, Fok says Prime Minister Ariel Sharon wants Hutchison to buy a stake in state-owned carrier Bezeq. "I told him we'd study the opportunities," says Fok. In India, where Hutchison has 20% of the conventional mobile market, it is teaming up with local player Essar Telecom to bid for more cellular licenses. "Our stance is to take a long view and move things forward a step at a time," says Asim Ghosh, managing director of Hutchison Max Telecom, who adds that the focus will be "on quality rather than size."

Back home in Hong Kong, Li has taken advantage of the telecom recession. In April, Hutchison bought back a 25% stake in its Hutchison Telecom from Motorola Inc., pushing its stake back up to 75%. (Japan's NTT DoCoMo owns the rest.) With Motorola struggling, Li was in the driver's seat, paying just $115 million, or $68 per subscriber. In 1999, when Li sold a 19% stake to DoCoMo, the Japanese company had to pony up nearly four times that price.

Telecom isn't the only focus, as Fok says he's determined to continue buying dot-coms. Hutchison and sister company Cheung Kong Holdings Ltd. paid $110 million to raise their stake in Priceline, making them the biggest shareholders. Hutchison plans to launch Priceline 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. Growth shouldn't be hard, he says: "They have incurred most of the fixed costs already. Having reached this stage, they'll never look back."

BIG TABS. The Priceline stake is just the latest addition to Li's e-commerce portfolio. There is an online trading joint venture with Credit Suisse First Boston. Hutchison and Cheung Kong also own a controlling stake in Ltd., a Chinese-language portal that was widely derided for going public before building up a business. Today it is pursuing an online and offline strategy. It's expanding into traditional print media as well as outdoor advertising and sports promotion. Later, says CEO Sing Wang, the company hopes to capitalize on Hutchison's 3G expansion by providing Chinese-language content over high-speed mobile networks.

It's not all smooth sailing ahead. Although Hutchison has financed its British 3G venture, 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. "The 3G business will require management to spend more time over there," says Philip Tulk, a vice-president at Lehman Brothers in Hong Kong. "It's not going to happen easily."

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 determined to pull off an encore.

By Bruce Einhorn with Mark L. Clifford in Hong Kong

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