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3 Group Europe: Buying Not Selling

by Richard Guppy | Oct 23, 2014

It was great to update the Dossier on Hutchison’s 3 Group: it became clear that the company had transformed from what in my mind was a loose set of investment properties that head of Hutchison Whampoa Limited (Mr Li Ka-shing) might sell for profit at any time, into a solid integrated business which is growing its subscribers, revenues and profits both organically and through acquisition, and which is now a key part of Hutchison.  See all Dossiers here.

3 Group acquired Orange Austria in 2012, and Telefonica’s O2 Ireland business this year. Orange will make it the substantial number 3 player in Austria; O2 will make it the clear number one player in Ireland. Its subscriber growth excluding those acquisitions has been positive; and EBITDA and EBIT conversion from loss to significant profit has to be a success story for 3 Group.  The one very weak spot has been Australia, where network issues have driven subscribers away from the Vodafone Hutchison Australia (VHA) joint venture in large numbers, and large losses have been recorded (though small positive EBIT returned in 1H14).  Placing VHA in special measures is why 3 Group was renamed 3 Group Europe, with the removal of Australia from operational reporting.

Back in 2011, 3 Group was notable for its early embrace of mobile data and over-the-top internet and social apps like Skype and WhatsApp, together with generous data allowances at low prices for customers. Its network quality image was pretty flaky though, and it relied heavily on roaming agreements. Now, the whole world is embracing OTT apps and has converted to mobile data as the key growth driver.  For its part, 3 Group continues to edge out in front with innovative customer propositions, which include free roaming across 3 Group territories (‘Feel At Home’) and unlimited data packages. And, its network quality reputation has been improved and is winning awards, while its reliance on roaming is much smaller.

Where next for 3 Group?  It is understood to want to make acquisitions in Sweden and Italy, but cannot yet cut the right deal.  The UK is another market where it is performing well but is below scale: an acquisition here involving EE makes for an interesting scenario.  Yet such moves would merely amplify 3 Group’s growth potential.  More radical would be M&A in the domain of fixed telecoms - 3 Group is mobile-only at the moment. As things stand, it is already doing better than expected and better than some competitors – Vodafone makes a clear contrast in profit performance, as can be seen in the charts here.

The new 3 Group Dossier explores the company’s strengths, vulnerabilities and future options.  And remember, Mr Li is an entrepreneur through and through, and if the price was right, he might still sell anything.

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