If you live on the hill that overlooks the bay, and business has been good to you, whether you live in a British colony or under Chinese control, I imagine there’s little that can spoil your day in Hong Kong.
But, for Li Kashing, the Chinese magnate who saw off the British empire without too much exposure to the chilly winds of communism, the view from the hill must look a little bleaker this week.
Kashing’s Hutchison Whampoa interests (including Hutchison Telecom) sit on a 45 per cent stake in mobile operator Orange. And German media combine Mannesmann has offered some $33bn (&£20.6bn) for the entirety of Orange.
For the past month or so, that has looked like an attractive price for Orange, as it is double the valuation that Deutsche Telecom ascribed to its UK competitor, One 2 One. But this offer now seems too good to be true, with Vodafone AirTouch squaring up for a full-blown offer to Mannesmann’s shareholders, after the German board last weekend rejected friendly overtures to the value of about $107bn (&£67bn).
To be caught up in merger manoeuvres of this scale is a pleasant problem to have. There’s nothing like a bit of competitive inflation to make the capitalist blood course – and that must be as true of Hong Kong as any other global financial centre.
But the problem for Vodafone and for Mannesmann – and therefore for Hutchison – is that if Vodafone succeeds in acquiring Mannesmann, it is inconceivable for competition regulators to allow it to retain ownership of Orange. And as Vodafone is said to have already sounded out France Telecom as a potential purchaser of Orange, the disposal of the mobile operator becomes an urgent agenda item in the boardrooms of London and Dusseldorf.
The trouble with this for Hutchison is that Mannesmann was a buyer of Orange – that’s why such a high valuation was achievable – while Vodafone is a seller of it. It wouldn’t necessarily be a fire-sale, but potential bidders will be keenly aware that this has suddenly become an asset that must be sold, rather than one that must be bought.
None of this would matter much to Hutchison if it were able to slide its sale of Orange to Mannesmann under the wire before Vodafone came into view with its sun-eclipsing offer. But the transfer of $33bn-worth (&£20.6bn) of assets can hardly be achieved without attracting attention.
It almost certainly will attract the attention of the eagle-eyed, anti-trust mob, who may take the view that Orange has metamorphosed from a highly-valued asset in the Mannesmann portfolio to a poison-pill defence against aggressive takeover.
It will also attract the attention of shareholders of Vodafone, Mannesmann and any potential purchaser of Orange down the line. The proposed price that Mannesmann has on the table for Orange must be put against the price Vodafone could expect to achieve for it, as it inherits it with Mannesmann.
It is beginning to look highly unlikely that the Orange/Mannesmann deal can be completed until Mannesmann’s destiny has been decided.
Should Mannesmann finally retain its independence, the climate in which it valued Orange will have changed beyond recognition. In a small but significant way, the bubble of telecoms valuations will have been deflated. Hence the gloom on the hillside in Hong Kong.
The downward valuation of Orange is also unlikely to be a temporary blip. Mannesmann has already indicated that it intends to defend itself against Vodafone through value-based arguments, rather than by protectionist means. This will mean that it won’t seek to hide behind the German capital markets’ arcane rules and regulations that can make cross-border bids prohibitively difficult.
But this approach could indicate that Mannesmann won’t seek to force the issue of the Orange purchase until it has dealt with Vodafone’s bid. Although a quick resolution would suit Orange, whose stretched cashflow is sorely in need of relief, a swift conclusion is unlikely.
Whatever happens, Orange is unlikely to maintain the heady valuation that Mannesmann put on it a month ago, as its markets grow more competitive.
In the domestic UK market, for example, One 2 One has enjoyed a renaissance after Deutsche Telekom bought it from Cable & Wireless and MediaOne International last month.
Further symptomatic pressure came last week in the form of the launch of Virgin Mobile – a joint venture between One 2 One and Richard Branson’s combine – with a typically discreet exhibition of Branson in a giant perspex phone with naked lovelies of both genders. Say what you like about Virgin, it has a record of narrowing competitive margins – ask British Airways.
This is not necessarily the end of the road for Orange. It has built a fantastic franchise and is a major player in the mobile operator market. But its future is less bright than it was until recently. And the market’s future is far from Orange.
George Pitcher is a partner of issue management consultancy Luther Pendragon