Citic Pacific mulls on selling partial stake in Citic Telecom

CITIC Pacific to pocket around HKD1-HKD2 billion.

In an announcement last Wednesday, CITIC Pacific Limited (Ba1 negative) said that it was contemplating a restructuring involving the sale of a partial stake in CITIC Telecom International Holding Limited (unrated) to parent CITIC Group Corporation (Baa2 stable). If the sale proceeds, CITIC Telecom will cease to be a subsidiary of CITIC Pacific, but will continue to be CITIC Group’s subsidiary.

Moody's notes that the transaction is credit positive for CITIC Pacific because it will likely reduce the incremental debt needed to fund the gap between CITIC Pacific’s capex plan in 2013 and its internal generated cashflow from operation.

"We think the deal will be completed, given the relationship between CITIC Pacific and CITIC Group. CITIC Pacific, whose main businesses are in steel, iron ore, and property, currently holds a 60.6% equity stake in CITIC Telecom, a Hong Kong-listed company that owns and operates an independent telecom hub that provides interoperability and interconnection services to 596 telecom operators in 71 countries and regions. CITIC Telecom also holds a 20% stake in Companhia de Telecomunicacoes de Macau S.A.R.L (CTM, unrated), the only integrated telecom service provider in Macau, and is in talks with another CTM shareholder to buy that shareholder’s 51% stake," it said.

CITIC Telecom had a market cap of around HKD4.25 billion as of last Friday’s close and a book equity value of around HKD2.2 billion as of the end of 2011. Although there are no publicly available details on the consideration CITIC Group would pay, Moody's expect CITIC Pacific to pocket around HKD1-HKD2 billion for its 60.6% stake in CITIC Telecom. In 2011, CITIC Telecom’s profit contribution was HKD299 million, or 2.7% of CITIC Pacific’s net profit.

"CITIC Pacific has been plagued by repeated delays and cost overruns at its iron ore project in Western Australia, declining iron ore prices and weakness in its special steel and property business. Although we do not expect liquidity problems to affect CITIC Pacific’s ability to meet upcoming capex and debt repayments, it is quickly running out of cash and will be adding more debt (it reported debt of HKD112 billion as of 30 June). The additional cash from the CITIC Telecom stake disposal would reduce the additional debt needed to cover the gap between its capex and cashflow from operations, which we expect to be around HKD5 billion in 2013," said Moody's.

The asset disposal is the latest example of CITIC Group’s support for CITIC Pacific. Last year, CITIC Pacific transferred a 50% non-controlling interest in CITIC Guoan to its parent, generating HKD4 billion of cash for CITIC Pacific. In 2008, CITIC Group offered a $1.5 billion stand-by liquidity arrangement for CITIC Pacific after it incurred huge losses from foreign-exchange derivative contracts, and subsequently increased its equity stake to 58% from 29%.

"The transaction also indicates that CITIC Group is consolidating its subsidiaries’ various businesses so that they focus more on their core businesses and improve their operational efficiencies," added Moody's.