#5: CASE ANALYSI S

HUTCHI SON WHAMPOA LTD.:

THE CAPI TAL STRUCTURE
DECI SI ON
CORPORATE FI NANCE-I I
TERM I I I ( 2 0 1 2 )
PROF. K UL BI R SI NGH ( I MT-NAGPUR)
BACKGROUND: HUTCHI SON
WHAMPOA LTD
Hutchison is a Hong Kong-based conglomerate with
global operations in multiple business.
Though it is a public company, Mr. Li Ka-Shing owns
a significant share of the company.
In recent years, Hutchison achieved significant
growth.
Revenue grew more than82 per cent between 1991
and 1995, while EPS increased by 87 per cent.
It is important to notice that though Hutchison is
well known in Hong Kong, it actually has a very
sizeable operation internationally, e.g., Orange
mobile telecommunication service in the U.K., Husky
Oil in Canada, and many infrastructure and real
estate projects around the world.
Hutchison has also made significant commitments
to mainland China, which is one of the worlds
fastest growing economies.
Prof. Kulbir Singh (IMT-Nagpur)
2

BACKGROUND: HUTCHI SON
WHAMPOA LTD
Many of Hutchisons businesses such as real estate,
energy, port operations and telecommunication required
significant up-front capital outlays.
Projects usually took a long time o generate a positive
cash flow and earn a return on investment.
To match such a revenue stream, Hutchison would want to
raise long-term financing.
At the same time, it will have to take into consideration
interest rate risks and foreign exchange exposures.
Prof. Kulbir Singh (IMT-Nagpur)
3

CURRENT CAPI TAL STRUCTURE
AND FUTURE CAPI TAL NEEDS
Respite its aggressive growth, Hutchison has maintained
a relatively conservative balance sheet.
Long-term debt to capital ratio was 30 per cent in 1995 and
29 per cent in 1994.
Cash flow statement: despite strong cash flows from
current operations, still the co. used external financing to
support its investment activities ($8.3 billion in 1995, $14
million in 1994).
Exhibit 9: The co. has relied on bank loans and shorter-
term debt (repayable within five years).
Bank loans make up about 70% & almost 50% of the loans
are repayable within five years.
A significant portion of the not repayable within five years
loans were a $5.96 billion 10-year FRN (floating rate note)
issue in 1994 and repayable in 2004.
Prof. Kulbir Singh (IMT-Nagpur)
4

CURRENT CAPI TAL STRUCTURE
AND FUTURE CAPI TAL NEEDS
The case reveals that Hong Kong companies tend to rely
more on short-term, floating rate bank loans as their top
choice of external financing. (why?)
To remain financially flexible under all situations.
Other research has suggested that lack of long- term, fixed
rate investors and complex disclosing requirements could
be two other explanations.

There is mismatch between Hutchisons long- term
intensive capital investment with a shorter term,
floating rate debt financing structure.

Prof. Kulbir Singh (IMT-Nagpur)
5

Compare debt financing and equity financing: Relative
impact on stock price
Exhibit 10: HWLs list of commitments made in 1994 and
1995
Analysts believe that HWL needs more than US$ 05 billion
in next 5 years
Attempt Q1.

Q1. Assume Hutchison Whampoa will require US$1 billion of financing in
1996. Assume that new equity can be raised at $48.8 a share and
that a long-term debt issue will carry an interest cost of HIBOR plus
70 basis points (bps). How would an equity or debt issue impact on
Hutchisons financial position and performance?
See TN-1

Prof. Kulbir Singh (IMT-Nagpur)
6

Results show that EPS increase with debt
Using constant P/E ratio, stock price will also increase.

Analyze the Modigliani and Miller proposition on
the use of leverage and under what conditions
leverage has a positive effect on EPS.
Impact of tax on EPS

Prof. Kulbir Singh (IMT-Nagpur)
7

Should HWL issue straight forward new equity?
Benefits?????
Disadvantages????????
No. Then what is next alternative?

Prof. Kulbir Singh (IMT-Nagpur)
8

DEBT OPTI ONS
What are different debt options
Syndicated bank financing
Straight debt
Eurobonds and
Yankee bonds.
Public offering or
Restricted offering (rule 144A)


Criteria
Cost.???????
Maturity?????
Floating vs. Fixed Rate ???????
Size of Capital Market ..?????
Market Receptiveness?????


Prof. Kulbir Singh (IMT-Nagpur)
9

Any other criteria???
financing flexibility,
foreign exchange exposure,
in-house knowledge of the capital market and
speed to the market.

Possible bond rating for HWL???
Use Exhibit 4 to 6
See TN-3
Whats importance of bond rating??? (see Exhibit 15)

See TN-4 : Analysis of debt options mix
Prof. Kulbir Singh (IMT-Nagpur)
1
0

WHAT HAPPENED? WHAT HAPPENED?
Hutchison Whampoa was assigned a A3/A+ rating from
Moodys and Standard and Poors, respectively.
The company decided to go ahead with a US$1 billion Yankee
bond offering.
The company had drawn on short- and medium-term loan
facilities underwritten by banking syndicates for external financing.
But with Hutchisons diverse and expanding operations, the
needs of the group were beginning to extend beyond the
local banking community.
The need for long-term financing was also prompted by the
recent reorganization of the Cheung Kong (Holdings) group,
which resulted in Hutchison Whampoa acquiring an 84.58 per
cent interest in Cheung Kong infrastructure.
Moreover, the time was ripe to increase the ratio of fixed-rate
funding at prevailing yields, which were currently attractive.


Prof. Kulbir Singh (IMT-Nagpur)
1
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