CVC seizes rare chance to buy HK telecom asset

CVC Capital Partners' HK$5 billion ($644 million) purchase of City Telecom's telecom business is not only unusual for being a large-ticket buyout. It is also rare for a major Hong Kong internet service provider to come onto the market.

CVC has acquired several international direct dialling (IDD) businesses in Hong Kong and Canada, but the plum asset is Hong Kong Broadband Network (HKBN), which owns and operates a fiber network that serves approximately 2 million homes and 1,700 commercial buildings in Hong Kong.

HKBN offers broadband, VoIP, IPTV and IDD services, competing against the likes of Hutchison Telecommunications, PCCW and I-Cable Communications. None of these three firms is likely to carve out part of its business to private equity. It is interesting that City Telecom is only doing so to finance the expansion of its domestic television operations, an area in which it will compete with the likes PCCW and I-Cable.

"Only a handful of buyout firms have the capacity to handle a deal of this size," a source familiar with the transaction tells AVCJ. "And CVC didn't want to miss out on an opportunity to enter Hong Kong's telecom market."

CVC is acquiring the business through Metropolitan Light Company, a Cayman-incorporated entity controlled by CVC Asia Pacific. The private equity firm is putting in HK$2.65 billion and will finance the remainder of the transaction through a HK$2.5 billion loan from J.P. Morgan and Standard Chartered. Roy Kuan, managing partner at CVC Asia, was responsible for the deal.

CVC's primary objective is to keep an already lucrative business ticking over. To this end, it is retaining the telecom unit's existing management and incentivizing them with equity interests. City Telecom announced EBITDA of HK$594 million for the year ending August 2011, up 26.5% year-on-year. While international telecom traffic volume has fallen steadily over the last four years, broadband subscriptions have more than doubled, and the VoIP and IPTV businesses have seen steady growth.

City Telecom said that, given the likely endorsement of its application for a domestic free television program service license, it was the right time to divest the telecom business. The company expects to commit at least HK$2.5 billion to its broadband television operations in the next four years. A further HK$2 billion of the proceeds will be paid to shareholders as a special dividend.

CVC is currently investing out of its third Asia Pacific buyout fund, which closed at $4.2 billion in 2008.

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• Topics
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• Greater China
• Buyouts
• Hong Kong (China)
• CVC Capital Partners
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