China Citic Telecom shares surge after $1.2 billion Macau deal

HONG KONG/LONDON Sun Jan 13, 2013 10:12pm EST

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HONG KONG/LONDON (Reuters) - Shares of Citic Telecom International Holdings Ltd had their biggest one-day percentage gain in more than two years on Monday after striking a $1.2 billion deal to gain control of a Macau telecommunications company from Cable & Wireless Communications Plc (CWC.L) and Portugal Telecom SGPS SA (PTC.LS).

The deal will help Citic Telecom, backed by China's state-owned conglomerate Citic Group, gain greater access to fast-growing Macau and more retail customers. That prompted a near 18 percent rally in Citic Telecom shares on Monday, the biggest one-day gain since September 2010.

On Sunday, Citic Telecom agreed to buy a further 79 percent stake in Macau's dominant telecommunications operator Companhia de TelecomunicaƧƵes de Macau SARL (CTM). Macau, the world's largest casino market, has been performing strongly for CWC mainly due to tourism, but the London-listed company is exiting some non-core markets to focus on the Caribbean and Central America.

Citic Telecom (1883.HK) had already acquired 20 percent of CTM in 2010 and the latest deal will give it 99 percent. Government-owned Macau Post will continue to own a 1 percent stake, the two Chinese companies said on Sunday.

Citic Telecom and Citic Pacific are part of China's state-owned Citic Group, with businesses spanning financials to mining. Citic Telecom is focused on China and Hong Kong, but is expanding into international markets, it said in the statement.

Citic Telecom has also been diversifying its customer and services profile from wholesale to become more consumer-focused, the statement said.

CWC DIVESTMENTS

CWC sold its 51 percent stake in CTM for $749.7 million, it said in a separate statement. The sale comes after the British group, which traces its history back to the 1860s, sold assets in Monaco and in island nations like the Maldives to Bahrain Telecommunications Co BTEL.BH in December in a deal worth up to $1 billion.

"Our sense is that CWC management is now more in control of its destiny having rid itself of onerous commitments left over from the CW Group demerger," Deutsche Bank said in a report.

"With asset sales now agreed, investor focus will shift to the ability to grow existing assets and augment growth with new investment," it said, adding that the deal represents a sound valuation based on its discounted cash flow model.

Portugal Telecom said it would sell its 28 percent stake in CTM for $412 million and also signed a technology partnership with Citic.

"This sale reinforces even more our financial flexibility," Zeinal Bava, CEO of Portugal Telecom, said. The CEO said the sale would allow the group to focus investments in strategic areas: Portugal, Brazil and Africa.

The deal values Macau's CTM at $1.47 billion including debt and represents an enterprise value to core earnings multiple of 8.9 times based on results for the 12 months to 31 March 2012, CWC said. CTM had a net cash balance of $70 million as at 31 December 2012.

CTM is engaged in mobile, fixed-line and broadband services in Macau and is a major supplier of telecommunication services to corporate customers in Macau.

By 0229 GMT, Citic Telecom shares were up 15.2 percent at HK$2.58, retreating from a 52-week high of HK$2.64. The benchmark Hang Seng share index .HSI was up 0.3 percent.

Located on China's southern coast, Macau, a special administrative region like neighboring Hong Kong, raked in $38 billion in annual gambling revenues in 2012 after monthly revenues for December hit a record.

Citic Telecom plans to fund the acquisition with internal resources and has secured some funding commitments from a group of banks and other financial institutions, it said. It may also consider raising fresh equity or bonds at a later stage to refinance the current facilities, it added.

CTM reported revenue of $524 million and profit before tax of $133 million in the 12 months to March 2012. It had $323 million of gross assets, and 460,000 mobile customers, 173,000 fixed-line customers and 142,000 broadband customers, as of 30 September 2012.

Barclays Bank is acting as the lead financial adviser and Citic Securities Corporate Finance (HK) Ltd is acting as the financial adviser to Citic Telecom. CITIC Securities Corporate Finance is also advising Citic Pacific. J.P. Morgan Cazenove advised CWC.

($1 = 7.7518 Hong Kong dollars)

(Reporting by Denny Thomas,; Kate Holton, and Filipe Alves; Editing by Michael Flaherty, Jane Merriman and Matt Driskill)

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