hta & tls, page-2

Hi mike,

A good approximation for HTA can be found in the actions of its parent, HWL (in Hong Kong).

HWL sold out of Orange in the UK at the height of the last telco boom (ie: 2000), selling to Mannesmann which, in turn, was acquired by Vodafone.

In early 2002, HWL also sold out of Voicestream in the USA, again, near to the height of the last US domestic telco boom.

Hutchison is renowned for exiting previously core businesses so that it can invest, or re-invest, in new core businesses.

3G is core to Hutchison's global telephony business going forward whilst CDMA (carried by HTA through Orange in Australia) is not.

HWL does have some 2G based businesses, notably in Hong Kong, Thailand and in India, but these are GSM, not CDMA, based.

In 3G, Hutchison's global position has been to:
1)
seek out co-investors where practicable (ie: UK, Italy, Sweden, Ireland, Austria, Hong Kong, Israel, Australia and NZ); and
2)
network share where considered prudent or practicable (ie: UK, Sweden, Denmark).

In Australia, HTA's Business Case is predicated upon going it alone (ie: without network sharing, etc). However, "3" is already a co-invested business with HTA holding 80% and TEL holding 20%.

In NZ, HWL already has a JV arrangement in place (but without HTA participation) should TEL go down the path towards 3G whilst both Vodafone and Telstra (through TelstraClear) have significant NZ operations in place.

Within the Australian environment, it has not surprised me that that:
1)
discussions regarding HTA exiting from Orange CDMA have been taking place with TLS (the only concern here is how long those discussions will continue before agreement is finally reached); and
2)
network sharing discussions have occurred with Vodafone and with TLS (but to no avail).

In considering the different options, HTA's CDMA business is only of value or potential to TLS. Acquiring the Orange business will permit TLS to expand its CDMA offering whilst enabling it to look at a hybrid version of 3G based on the 1X standard (ie: with a data bias). It is, therefore, likely that the CDMA discussions are continuing with the following as likely hurdles in the negotiations:
1)
price;
2)
any issues regarding network inter-operability, etc (ie: need for any network upgrades to reflect differences in deployed network standards /versions of equipment);
3)
the managed services position concerning how, and to what extent, Ericsson will continue providing managed services to the Orange CDMA network when it is rolled into TLS (the former HTA employees were transferred to Ericsson as a result of the 7-year, 2002 agreement on MS and TLS may not be keen on Ericsson maintaining the MS activities, or expanding those activities to also include the TLS side of the equation); and
4)
continuing network access, particularly given that HTA will need either GSM or CDMA roaming capabilities to complement its "3" service (it already has roaming onto Vodafone GSM once outside of "3" coverage areas, Optus broadband /cable backhaul support, and TLS voice roaming for its Orange network via TLS's CDMA service).

An exit from the Orange business, however, is likely sooner rather than later as the business is now profitable, it would complement TLS's CDMA service, and a timely exit would complement Hutchison's wider approach of divesting assets to re-invest in new core businesses.

On the "3" front, modelling of different scenarios involving Vodafone, TLS, TEL and Optus has been ongoing for quite some time. HTA has looked into the prospects of doing this and may well have gone as far as either preparing submissions to the regulators on this, or seeking competition permission to proceed. Any form of network sharing, irrespective of the partner selected, would require regulatory and competition clearance, given both the nature of the telecom's industry in Australia, and the prospective nature of "3" and 3G forming its own defined market for ACCC purposes.

On balance, however, the inclusion of TEL as a 20% shareholder in "3" complicates any form of prospective network sharing with either Vodafone or with TLS.

In my estimation, a coupling with Vodafone would only ever occur if this could be engineered by Ericsson. However, with:
1)
Nokia have last week been awarded the Vodafone 3G contracts for both Australia and for NZ; and
2)
TLS rapidly closing in on the prospective award of the Vodafone managed services business for Australia (again meaning that Ericsson, as the primary network supplier, would have lost out),
....
it is hard to see how Vodafone and HTA would come together for 3G network sharing purposes (despite already doing this in the UK, Sweden and in Denmark). More likely, Vodafone will go it alone without HTA, or Vodafone will likely couple with TLS sometime during 2005.

Conversely, a coupling between HTA and TLS would only occur if:
1)
TEL was taken out of the equation as a 20% minority player (this, however, would not suit HWL in NZ); and
2)
if TLS became the majority player in NetworkCo (ie: the network sharing JV) - again something that HWL would not readily support).

Support and entry pricing would also likely remain an issue, particularly given HWL's reputation for extracting top dollars in return for entry or admission to the network sharing arrangements.

More likely then that one or more of the following scenarios would occur:
1)
TEL increases its stake in "3" by injecting its AAPT business into "3" (ie: by means of agreeing to migrate its AAPT customer base onto the "3" network, injecting more funds into "3" and agreeing not to establish a separate 3G network in Australia);
2)
a network sharing arrangement is struck with Optus covering each of Australia, NZ, Singapore and other mutual Asian countries in which SingTel and HWL have a mutual, proposepctive or unilateral presence - including Indonesia, Philippines, Thailand, India, Hong Kong, and -through NTT DoCoMo's partial interest in Hong Kong Telecom - Japan). The advantage here is that:
a)
Nokia has deployed 3G switching equipment elsewhere for HWL (most notably in Europe) and so is no stranger to either 3G or to the HWL way of doing things;
b)
HTA is winning business from Optus and from Vodafone and, to some extent, Optus may well have to stop the rot from setting in;
c)
both HWL and SingTel share a common heritage (Asian based, expansionist, solidly supported, etc);
d)
HWL and the Singaporean Government (through Temasek Holdings) have previously collaborated together on trying to acquire Global Crossing (since collapsed due to US concerns over national security, etc);
d)
Optus is yet to roll out its 3G network in Australia (although it is in a dedicated testing phase);
e)
the Optus cable /fibre networks are already carrying HTA's backhaul traffic for "3";
f)
until October 2002, HTA was a major GSM reseller for Optus and both are familar with the way in which the other works;
g)
the account manager responsible for securing the HTA 3G business for Ericsson now works for Optus; and
h)
both Optus and HTA share the local characteristic of having relatively robust, modern and efficient networks in place.

The likely probability of some future tie-up between Optus and HTA, from a 3G network sharing perspective, therefore, is (in my view) around 35%.

HTA continung to go it alone is not likely (in my view) as an option - probably rated at about 20%.

A more comprehensive tie-up with TEL is also not likely (even though TEL is likely to need HTA more than the other way around, going forward). Hence a 15% rating.

A tie-up with Vodafone is very unlikely given the recent announcements made by Vodafone and the fact that Vodafone and HWL will increasingly be squaring off on the global 3G stage. Hence a 10% rating.

And, a tie-up with TLS would require some serious soul-searching by both organisations before this could ever eventuate. Hence, a 20% rating.

The odds, therefore (rated to 100%):
1)
Optus and HTA = ~7/4 (35%);
2)
HTA going it alone = 4/1 (20%);
3)
TLS and HTA = 4/1 (20%);
4)
TEL and HTA = ~65/10 (15%); and
5)
VODAFONE and HTA = 9/1 (10%).

As for any effect on the share price, the likely drivers to an appreciating share price will be:
1)
increased "3" subscriptions (already occurring);
2)
increased "3" ARPU values /revenue (occurring and accelerating);
3)
network sharing occrurring involving any of the above (constantly being seculated upon).

1) and 2) will form a base for the share price and will incrementally improve the share price over time. 3), however, would dramatically raise the share price going forward. As to what sort of share price would prevail, that's hard to say, but even fully diluted for the Convertible Notes, a $1.00 share price would only value the network at ~$1.5B.

In other words, a doubling in the share price would not surprise in those circumstances.

For a really serious share price though, the following would all act as major catalysts:
1)
Orange increasing in profitability;
2)
Orange being sold;
3)
"3" coming into break-even before 2007 (ie: 12+ months ahead of schedule); or
4)
network sharing being announced.

HTA, however, is not a short term play. It may well be 1-2 years before the share price returns to the heights that it scaled:
1)
just prior to the TEL announcement in May 2001, and the 3G contract announcement in June 2001; or
2)
the site acquisition arrangements that were announced in early 2002.