Euromoney, July 23 2018
There is something pleasingly retro about the Hong Kong IPO of China Tower Corporation.
Amid a tide of new technology listings, China Tower is strikingly tangible: it owns telecommunications towers, 1.8 million of them.
The deal, which seeks to raise up to $8.68 billion, has some other areas of significance too.
In another throwback, it is the largest state-owned float in Hong Kong since Agricultural Bank of China in 2010. It is a chance to put some zip back into the market after the mild disappointment of the Xiaomi listing, which raised $4.7 billion in June. And it is a fairly unusual opportunity to buy a company with a near-total monopoly in China, owning 97% of its market.
But perhaps the most interesting thing about it is what it tells us about Asian homegrown private equity.
The biggest disclosed cornerstone stake in the deal is a $400 million commitment from Hillhouse Capital, with a further $100 million from Alibaba. Classic China stalwarts are in there too – ICBC, Sinopec, SAIC Motor, as well as New York-listed Och-Ziff Capital Management – but isn’t this an odd, old-economy place to find Hillhouse and Alibaba?
On first glance, yes. Hillhouse made its name by being an extremely early investor in Tencent and JD.com, and really arrived in the big time in private equity terms by anchoring the group of buyers of logistics group GLP in Asia’s largest ever take-private deal. In early-stage investment, one associates it with investments such as Chinese anime website owner Bilibili and electric car startup Nio rather than with steel towers.
But it’s interesting to look at another Hillhouse deal which shows us things aren’t always as they appear. In April 2017, Hillhouse, alongside fellow homegrown private equity name CDH Investments, bought Belle International – a struggling Hong Kong-listed shoe retailer. It baffled the market at the time: what was an investor as savvy as Hillhouse doing with a shoe shop? But Hillhouse had seen the value in the data Belle had accumulated selling shoes to China, and saw the opportunity available in transforming the business for a digital world.
Alibaba seems an even less likely buyer of China Tower, but, again, some history is instructive. Four months before Hillhouse bid for Belle, Alibaba had led a $2.6 billion bid to privatize the department store operator Intime Retail. The premise was the same: take a struggling bricks-and-mortar business and reinvent it with all the expertise gleaned from being the world’s most dynamic e-commerce company.
So, what do they see in China Tower? Well, this line in the company’s listing prospectus gives us a clue: “We are an indispensable driving force in the implementation of China’s strategy of building strength in cyberspace.”
Beyond that, it represents stable cash inflows in regular service fees paid by customers under long-term contracts. Service contracts with telco customers are typically signed for five to 15 years and have a very high renewal rate since there isn’t really anywhere else they can go.
Understanding businesses like Hillhouse – as well as similar local private equity names such as Hopu and CDH – is becoming more important to banks in the region. “People are saying: we’re not doing M&A anymore, we’re doing venture capital,” says one investment banker in Hong Kong. That means a different advisory role is required. Advisers understand that there will be some deals groups such as this can do themselves, for minority stakes; and there will be control deals where M&A bankers still get a look in.
“The smart sponsors do have very powerful internal machines in terms of generating deals,” this adviser says. “They will only pay for ideas. And you need to know what they’re thinking.”
One other area where China Tower is a throwback is in having a reasonably rational syndicate. There are just two sponsors – Goldman Sachs and CICC – with Bank of America Merrill Lynch and JPMorgan alongside as joint global coordinators and joint bookrunners. Admittedly, once you get down to the joint bookrunner level there are 15 of them, but that’s still an improvement on 26 for Postal Savings Bank of China (PSBC).
It will also be far less reliant on cornerstone investors: 79% of PSBC went to friends and family, whereas China Tower will place $1.4 billion to cornerstones out of almost $8.78 billion. Furthermore, $800 million of that is to Hillhouse, Och-Ziff and Alibaba, who certainly aren’t investing for the Chinese government or to be nice to their friends.
So, for all that this is an old-style deal – the business is even profitable – it has a new twist too: that the people driving it from the investor side are local, smart, long-term, private and very, very sharp on tech.