NiQ Lai: With CVC's support, we are now investing for telecom
growth. At HKBN we will open up the throttle and let the market
innovate with bandwidth-hogging applications
Talk to operators around the world and most of them will say
the last thing they want to be is operators of dumb pipes. And
then they will start grumbling about how the over-the-top
content providers are stealing their lunch.
There's one notable exception: Hong Kong Broadband Network,
which became an independent company, majority owned by private
equity, in April 2012.
"At HKBN, what we are passionate about is big fat dumb pipes,"
says NiQ Lai, the former banker who is chief financial officer
of the company. He goes on: "We are not interested in creating
our own content. Rather we embrace working with over-the-top
HKBN loves bandwidth-hogging applications for its big fat
pipes. The minimum bandwidth you can buy from HKBN is 100
megabits a second - and that costs the equivalent of just US
$23 a month. For the equivalent of $10 more, a total of $33 a
month, you can upgrade to a gigabit.
"We have over 600,000 customers with 100 megabits and above,"
says Lai. "We are by far the leading carrier for 100 megabits
and above services."
Both those services - 100 megabits and one gig - are symmetric.
It is "among the best value in the world. It's a non-linear
price relationship moving from 100 megabits to 1 gigabit. You
get ten times the speed for 40% extra price. When people buy
our 1 gigabit service, it's like getting water from a fire
HKBN was founded by Ricky Wong, an entrepreneur who
revolutionised the Hong Kong telecoms market in the early 1990s
by breaking the incumbent's monopoly over international direct
dial. The broadband venture was the second phase of his
entrepreneurial career, "turning Hong Kong into the fibre oasis
it is today", he says.
But in April 2012, Wong's company, City Telecom, sold HKBN to
private equity investor CVC Capital Partners for HK $5.1
billion - equivalent to about US $650 million.
CVC is one of the largest private equity firms in the world,
managing over $44 billion in funds, with a portfolio of around
60 companies with more than 400,000 employees.
About half of CVC's purchase price came from equity commitments
from funds that the private equity company advises; the rest is
debt commitments from JPMorgan Chase and Standard
The sale took place because Wong has moved on to the next phase
of his career, "better content and video for the global Chinese
market", says Lai. "This third phase is very different from the
dumb pipes business. You need a lot of money for making
content, and that would have squeezed the cash out of HKBN. In
short, content and dumb pipes are two very distinct business
and - similar to water and oil - do not mix well. Hence the
sell off to CVC."
According to documents filed in April when the CVC deal was
announced, City Telecom has applied for a Hong Kong
broadcasting licence and plans to build a multimedia centre,
due to be complete in April 2014. The statement added: "The
multimedia business of the group is a large-scale and long term
project requiring very significant financial resources and
commitments (which is expected to be in the region of not less
than HK $2.5 billion over the next for years)."
So Wong's determination to move into content led the HKBN team
to look for new owners. "We went through a very detailed
process. Over the years we've had many, many discussions with a
wide range of suitors, including numerous private equity firms
and various global carriers," says Lai. "CVC turned out to be
the best fit", not just for Wong but also for HKBN's management
team and the 2,800 staff - whom HKBN calls "talents" - who will
stay with the telecoms company.
"We needed to find a buyer with the right outlook, and a way of
realising value for Ricky," adds Lai, not just CFO but also
HKBN's head of talent engagement. He and the telecoms team are
passionate and enthusiastic about those big fat dumb pipes. "I
often walk around the streets of Hong Kong over the weekends
and take pictures of my family standing on our HKBN fibre
manhole covers," he says.
"With CVC's support, we are now investing for telecom growth -
whereas, being part of the old group, our telecom cash flow
would be been extracted to fund the new content business," he
says. "We are very excited by the growth prospects for our
space. Now, with CVC's support, we have the autonomy and the
finance to turn our dreams into reality."
The investment is not just by CVC alone. "We now have 61 HKBN
managers who are also co-owners of 13% of our company. We
pooled together HK $165 million, typically one to two years of
our salaries. We offered the deal to 80 executives and 61 took
up the option. That's a very high take-up rate."
How did they afford it? "The lucky thing about China and Hong
Kong is the saving rate is very high. It's a cultural thing,"
he says. "Plus many people did very well with their City
Telecom stock options over the past years and they are putting
these gains into HKBN."
But, he accepts, "one to two years' salary is a very material
number, which requires family support to decide upon". That
means "this is a very strong sign of commitment from the team",
"Other companies elsewhere in the world probably couldn't have
done this - people don't often have one or two years of
disposable income to invest even if they have the desire to do
so. Our colleagues discussed this investment opportunity with
their spouses, their parents and families as part of the
decision process. You really have to have high confidence in
yourself, the management team and CVC to make this kind of
The staff investors have to be sure, because won't be able to
get their money back if they leave, he warns. "If people leave,
be it termination or voluntary, their investment stays in the
company until CVC exits and they are paid the lower of cost or
market," says Lai.
"For people to make money, they must contribute to the company
through the period until CVC's exit. It's not like buying
shares in a listed company where you can freely trade in and
out." And, "a typical private equity investment is three to
five years before exit. It's a milestone for us to work
Several months after completion, what now? Around 85% of
households in Hong Kong have broadband but fewer than half of
those - about 40% of the total - have fibre. That's a high
number in world terms, but Lai believes there is an opportunity
But what will they need it for? "Our approach is that you can't
predefine innovation. At HKBN we will open up the throttle and
let the market innovate with bandwidth-hogging applications.
It's like electricity." Early electric power companies used the
number of light bulbs as their measure of consumption, "but
they didn't envisage microwave ovens, electric blankets,
62-inch TVs, and so on", he says.
"What we are selling is the equivalent of a Porsche 911 for the
price of a Toyota Corolla. The questions about whether you need
the extra speed become irrelevant as the value proposition is
Over the past few years HKBN has gradually climbed up the Hong
Kong telecoms league. "We are now the clear number-two carrier
in residential revenue terms and we are bigger than numbers
three and four combined. We have leapfrogged our way to a very
solid number two position."
And the company is profitable: "We are the most profitable in
terms of return on assets. And we're the fastest growing in
terms of market share. In short, we are harvesting the benefits
of our over decade of investing over HK $4 billion into our
The company reached positive free cash flow in 2007 after
losing money in the first seven years and it is now "over the
hump of our capex investment profile".
The last financial report when HKBN was part of CTI, a listed
company, showed a profit of HK $350 million and an 18% return
on equity. "As we are now a private company, we no longer
report publicly our financials," says Lai, adding: "Since then
we've further grown in terms of net profitability."
It is a model Lai and his colleagues want to take outside of
Hong Kong? He's consistently said no over the years, and
repeats that: "We are very happy with the growth opportunities
in Hong Kong. It's about fibre in a highly dense community. Our
business is about making our home, Hong Kong, a better place."
But that doesn't mean the company isn't looking for new
opportunities within Hong Kong: "We always look for disruptive
opportunities," he says. "We always look for ways that we can
do things differently to deliver disruptive value to our
He contrasts the company with the walled-garden approach of
many. "We encourage open-garden over-the-top content," he says.
"Our point is we make a very decent return from the monthly fee
we charge our customers and we don't mind OTT players also
making money with us. In fact, we need OTT players to help fill
the massive big fat dumb pipes that we offer - otherwise there
will be no need to switch from legacy copper to our fibre."
That is a lesson that many other telecoms operators worldwide
could learn from.
NiQ Lai will be talking about the CVC buy-out of HKBN at the
Global Telecoms Business financial conference in London on 22
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