Hutchinson Whampoa limited: the capital structure decision

Topics: Bond, Hutchison Whampoa, Cheung Kong Holdings Pages: 32 (8156 words) Published: February 24, 2015
30017 Corporate Finance
Hannes Wagner
The included PDF files are examples of case study write-ups made by students of the 30017 Corporate Finance course in 2012-2013. The underlying case was “Hutchison Whampoa Limited: The Capital Structure Decision”. The write-ups were evaluated as “excellent” and the students have agreed for their work to be distributed. All rights to their work remain with them. The instructions that students received were the following:

“Your assignment is to provide a written analysis of the case. We will discuss the case in class as indicated in the syllabus. All team members should be knowledgeable about the facts of the assigned case. While dealing with the decision problem at hand, your report should address the following questions:

1. Assume Hutchison Whampoa will require US$ 1 billion of financing in 1996. Also 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 Hutchison’s financial position and performance?

2. Assess Hutchison Whampoa’s current capital structure in light of its future financing needs. 3. What bond rating do you think Hutchison Whampoa will be able to obtain from S&P? 4. Compare the debt financing options. Explain why you are for/against the Yankee bond option.

5. What kind of capital structure would you propose to Hutchison Whampoa and why?”

Group name: $Wagner
Balzola, Guglielmo (1607498) – class 17; Borsos, Robin (1564970) – class 17; Jakab, Tamas (1579747) – class 18; Pallotta, Matteo (1562016) – class 16; Ragini, Raffaele (1570472) – class 18

After careful analysis, the finance department of Hutchison Whampoa Limited (HWL) compared two proposed financing options: USD 1 billion equity issuance and the equivalent debt issuance. In light of its current capital structure and the expected BBB rating, we propose that the company diversifies its capital structure. This should be done by increasing its leverage, issuing debt in the form of Eurobonds and Hong Kong bonds, while keeping its investment grade bond rating. If the company risks losing its rating, then more capital can be raised by equity issuance, but maintaining the control of the main shareholders.

We have summarized the relevant details in Exhibit 1 in order to maintain transparency.

In order to finance and maintain the forecasted impressive growth, HWL needs to raise external financing. The main question is that the required financing of USD 1 billion (for 1996) be raised by equity issuance or by long-term debt issuance. In order to choose the best option, we have to assess HWL’s current and prospective capital structure, compare the available debt options (also predicting the rating agency’s evaluation of HWL) and propose an adequate capital structure for the future.

In order to compare the financing options, we always refer to Exhibit 2. The company has 3610 million shares outstanding1. HWL needs USD 1 billion, which is equal to HKD 7.76 billion. A successful evaluation of the financing options requires forecasts for the year 1996. Considering the growth opportunities, and the past years, we forecasted a conservative profit growth rate of 12%.

The company issues shares at the price of HKD 48.8. This means that the company issues 159.02 million shares, thus increasing the total share capital to HKD 66 599 million. Assuming that the P/E ratio is constant, EPS increases to 2.84. This increase is due to the fact that the positive effect of increasing profitability outweighs the negative effect of new issuance. The profitability and payout rate increase also prevails in case of dividends, so dividends per share increases to 1.34. Secondly, we predict that the stock...
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