CK Hutchison: Announces Vodafone Merger Details, but Regulatory Competition Hurdle Remains

CK Hutchison and Vodafone have announced the details of the proposed merger of their U.K. telecommunications assets into a merged entity named MergeCo for now, in which CK Hutchison would own a 49% stake and Vodafone would own a 51% stake. Upon closing, Three UK and its subsidiaries will cease to be a subsidiary of CK Hutchison and will be deconsolidated from the consolidated financial statements of the company. As a result, the total assets and liabilities of the group are expected to be reduced by HKD 15.69 billion and HKD 15.73 billion, respectively, resulting in an expected increase in the group’s net assets of HKD 40 million. From a valuation perspective we estimate that if the U.K. telecom assets of the group increased in value by 50% as a result of the merger this would add around 5% to our valuation for CK Hutchison. However, we retain our existing fair value estimate for CK Hutchison of HKD 74 per share for now as the merger still needs approval from the Competition Markets Authority, which has had concerns in the past about the effects of telecom mergers on competition and consequently on telecom pricing. It will need to offset these concerns against the promise of a more profitable merged company that will increase investment in telecom networks and services than two less profitable ones, and on the potential for the larger merged company to provide more competition to the incumbent operators.