Why Li Wants to Swallow Global Crossing

He'll probably fix it up and flip it for a profit as soon as he can

Last summer, Global Crossing Ltd. (GX ) chairman and founder Gary Winnick knew his Bermuda-based fiber-optic telecom company was in trouble. Plagued by overcapacity and falling prices, Global Crossing was ailing and needed help fast. So Winnick called Li Ka-shing, billionaire chairman of Hong Kong conglomerate Hutchison Whampoa Ltd. (HUWHY )

Winnick had reason to believe Li would help. In early 2000, Li had put $400 million into a Hong Kong joint venture with Global Crossing. Besides, Li had already bailed out another New Economy partner, online travel service Priceline.com. But Li, famous for making profitable bets on distressed assets, turned Winnick down. And Global Crossing continued its fall, finally declaring bankruptcy late last month.

Now, Li is making his move. On Jan. 28, Hutchison Whampoa and Singapore Technologies Telemedia, a government-controlled company, said they would inject a combined $750 million into Global Crossing, enough to give them a majority stake. The details are still under negotiation, and creditors will need to agree to accept drastic cuts on their $12.4 billion in Global Crossing debt. But if the deal goes through before a late August deadline, Li and his Singapore partners will have won effective control of one of the world's largest and most modern fiber-optic networks for a bargain price.

The question is what Li intends to do with Global Crossing. One of Asia's few businessmen with international clout, Li isn't likely to hold on to the company indefinitely. There is no particular fit with Hutchison's other telecom operations. The most likely outcome, analysts say, is that Li will sell down the stake once the telecom sector recovers. Hutchison executives declined requests for an interview.

One reason Li's interest in Global Crossing might be short-term is that he is already heavily exposed to the telecom industry. In recent years, he has spent billions buying licenses to operate "third-generation" cellular services in Europe. And with Global Crossing's collapse, the $400 million in convertible preference shares that he took when he formed his joint venture "are possibly worthless," says Richard Ferguson, co-head of regional telecom research for Nomura International Hong Kong Ltd. That loss, Ferguson says, could put a big dent in Hutchison's 2002 profit, projected at $1.1 billion.

Li and his lieutenants are too busy with other telecom ventures to worry about integrating Global Crossing into a big telecom network. This year, Hutchison is expected to roll out its first 3G services in Britain and Italy. Also, Standard & Poor's reckons Hutchison will have to spend $11 billion on 3G infrastructure over the next five years--on top of $5.8 billion it has already spent on licenses. "They have big challenges in 3G as it is," says a Hong Kong analyst. "I don't know if you want to divert your attention right now." Especially if it means operating a different business--a fiber-optic backbone.

It's easy to see how Hutchison might be spread thin. Besides four European 3G licenses, it runs phone services in emerging markets stretching from Sri Lanka to Ghana to Paraguay. Li's cellular operator in Israel has just won a 3G license, and Jerusalem is trying to get him to buy a stake in government-owned fixed-line operator Bezeq. In India, Li has been acquiring stakes in operators as well as getting new licenses. "Hutch needs to pull all of these [Indian] acquisitions into one company," says Ravi Kapoor, head of investment banking at DSP Merrill Lynch in Bombay.

In late January, Hutchison's Australian subsidiary announced that it was buying assets of bankrupt operator One.Tel from Lucent Technologies for an undisclosed sum. That should help Hutchison Australia, which has long been a laggard in the local market, build up its subscriber base. Last year, Li formed a strategic alliance with Telecom New Zealand Ltd., which bought 20% of Hutchison Australia's 3G operator. The two expect to operate a 3G network in Australia by 2003.

Given all the distractions, it's a good bet that Li will not own Global Crossing for long. Thanks to sales of stakes in wireless outfits like Orange PCS and VoiceStream Wireless, Li has amassed more than $10 billion in cash and securities. With that kind of money, "this investment will hardly strain Hutchison's balance sheet," says Nomura's Ferguson. And given Li's track record, no one will be surprised if Global Crossing at some point turns into a handsome payday.

By Bruce Einhorn and Mark L. Clifford in Hong Kong

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