Philippine Long Distance Telephone Company (PLDT) has bought 20% in Manila Electric Company (Meralco) from the Lopez group, which increases its stake to 30% and effectively prevents San Miguel from taking control of the power distributor.
According to an announcement, PLDT will pay 90 pesos per share for 223 million existing shares, resulting in a total consideration of Ps20.07 billion ($416 million). The Ps90 price represents a 2.2% discount to Friday's close of Ps92. Part of the deal will be settled through exchangeable notes with a face value of Ps2 billion, which gives PLDT the right to acquire 22.22 million Meralco shares.
The Lopez family has been searching for a white knight that could come in and help it retain control of Meralco ever since the Philippine government sold 27% to the San Miguel group in October and its remaining 10% to an associated company of the same group a couple of months later. This meant the San Miguel group controlled 37% of the power distributor, compared with the 34% owned by the Lopez family through its group holding company First Philippine Holdings.
The Lopezs first bought Meralco in 1962, but lost control of the company in the 1970s during the reign of Ferdinand Marcos when it was taken over by the government. The company was returned to the family in 1986 after Marcos was ousted from power.
The first signs that something was brewing came early last week when PLDT announced that its employee retirement fund (the Beneficial Trust Fund) had bought 10.17% of Meralco in the open market during the past month, and Friday's announcement of a direct investment was therefore not all that surprising. The Lopez group is being advised by Macquarie Capital (Singapore). PLDT does not have a financial adviser on this transaction.
The Lopez family's stake in Meralco will drop to 14% as a result of the sale, but a source says PLDT will form an alliance with the Lopezs that will give them a combined 44% of the votes. According to the PLDT announcement, the two groups have agreed on certain governance principles such as the nomination of board directors and senior management officers, which will enable PLDT to actively support the Meralco management. The telephone operator views its acquisition in Meralco as a strategic investment and said it could lead to "significant opportunities for operational and business synergies and result in new revenue streams and cost savings for both organisations".
It added, however, that it does not intend to increase its direct investment in Meralco above the agreed 20%.
In a separate announcement on Friday, Philippine infrastructure and real estate investment company Metro Pacific Investment said it is in discussions with the Beneficial Trust Fund to buy its entire 10.17% stake in Meralco for cash. In turn, BTF may subscribe to new shares in Metro Pacific, becoming a significant shareholder in the company. Subject to approval by Metro Pacific's board, the acquisition price is expected to reflect BTF's investment costs for the same shares, which is approximately Ps10.3 billion ($213.5 million), and the current market valuation of Metro Pacific, which as of February 12 was Ps18.9 billion.
Metro Pacific said the investment will complement its existing investments in the road, water and hospital sectors, which is represented by controlling interests in North Luzon Expressway, Maynilad, Makati Med and Davao Doctors. It also noted that it is open to acquiring further shares in Meralco if suitable opportunities arise, in order to develop its position as a strategic shareholder with appropriate board and management participation and to enable it to equity account for Meralco's results.
Metro Pacific is 97.3%-owned by Hong Kong-listed First Pacific, which is also the single largest shareholder in PLDT with 26.4% of the voting capital.
The Lopez group is suffering from high debts and has been selling other assets over the past six months to ease the pressure. Thus it is unlikely that the Lopezs would have been able to increase their control of Meralco on their own. The sale to PLDT will give the Lopez family an injection of capital that it is expected to use both to pay down maturing debt and to fund its power generating projects. The group controls power producer First Gen Corp, which in turn owns a 40% controlling stake (it comes with 60% of the voting power) in Energy Development Corp (EDC), the dominant developer of geothermal power projects in the Philippines, which it bought from the government in November 2007.
In October last year, First Gen sold a majority stake in its wholly owned hydropower subsidiary to EDC, reaping total cash proceeds of about $105 million, which was to be used to pay down debt. And in August last year, First Philippine Holdings sold its 67.1% stake in the country's longest toll road and its 46% stake in the company that operates and manages the road to Metro Pacific Investment for $278 million for similar reasons.
In a testament to its good relationship with the Lopez family, Macquarie was involved in both these transactions too, advising the Lopez group on the toll road sale and EDC on its acquisition of the hydropower assets from First Gen.
When talking about synergies, PLDT was referring to the fact that it and Meralco have compatible networks and business infrastructure, such as fibre optic backbones, a power pole network and business offices, which can be optimised to generate cost savings for both entities. Other areas of possible collaboration, according to PLDT, include backroom assets in IT and data management, rights of way, bill statement printing, general procurement and advertising.
In terms of new businesses, Meralco could tap into PLDT's experience in the prepaid and mobile commerce areas to offer new services such as prepaid electricity and wireless bill payments and meter readings, while PLDT could explore the possibility of offering broadband services over Meralco's power lines.
Meralco is the largest power distributor in the Philippines with about 4.5 million residential, commercial and industrial customers. It also operates a 1,000-kilometre fibre optic network through its e-Meralco Ventures unit. In 2008 it generated a net profit of Ps3.1 billion ($64 million) on revenues of Ps191 billion. It has total assets of Ps178 billion and Ps119 billion of outstanding debt.
PLDT is making the investment through Pilipino Telephone Corporation, which is 92.8%-owned by its wholly owned mobile unit, Smart Communications. PLDT noted that Piltel has a sizeable cash position, which will allow it to fund this transaction largely from internal resources. The company will, however, need to seek shareholder approval at its annual stockholders' meeting on June 30.
PLDT's share price fell 5.5% in Manila trading on Friday to Ps2,145, while Meralco's shares gained 0.5% to Ps92.50 and First Philippine Holdings was unchanged at Ps25.50. Meralco has gained about 54% this year, supported by BTF's buying in the open market. On March 5 and 6, the final two days of its purchases, BTF paid an average of as much as Ps103.4 and Ps123.9 per share which contributed to a temporary spike in the share price on those two days.
