NiQ Lai: With CVC’s support, we are now investing
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 hydrant."
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
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
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", he says.
"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 commitment."
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 towards."
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 there.
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 fibre network."
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
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 society."
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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