Hutchison Whampoa: a crowd for 3

Three plus two equals five. So, naturally, Hong Kong-listed Hutchison Whampoahas assembled five partners to help fund the combination of 3, is UK mobile operation, and O2.

The five names include sovereign wealth funds from Canada and Singapore. Together, they will provide £3.1bn of O2's £9.4bn price tag in return for one-third of the combined entity. Hutchison will fund the balance with a debt facility of £6bn, and contribute 3 to the mix.

The deal, which is still subject to approval by the European regulator, looks good for Hutchison from a number of angles. It is financially well structured. The presence of the equity partners makes it possible for Hutchison to fund its portion with debt without overloading its balance sheet. Hutchison's net debt to equity will rise from about 25 to 39 per cent, based on year-end numbers. With last year's interest covered more than 10 times by earnings before interest, depreciation and tax, this looks manageable.

Operationally, too, there should be benefits. The UK's mobile market has been crowded, with four operators scrapping over frugal consumers. Hutchison's 3 has had the most aggressive pricing strategy. The merged entity would have two-fifths of the market, making price discipline easier and making room for higher returns. Citi estimates that O2's margins (of earnings before interest, tax, depreciation and amortisation) are in the mid-20s per cent range. Averages in the rest of Europe are in the 30s. Cost cutting could help, although limited visibility on 3's UK costs make the present value of £3-4bn in savings that Hutchison foresees hard to ratify.

Next month, Hutchison and sibling Cheung Kong should complete a reorganisation. Both promise that the reshuffle will allow them to pay out more to shareholders. An O2 and 3 merger could enable a further lift to Hutchison's 2 per cent dividend yield. Three, or higher, could be the magic number.

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