First Philippine Holdings (FPH) decided last night, after an extended board meeting, to accept Metro Pacific Investments' (MPI) counter bid for a 6.7% stake in Manila Electric Company (Meralco) at a total cost of Ps22.4 billion ($470 million).
MPI used a right of first refusal to match, on a per share basis, a bid for FPH's entire 13.4% stake in Meralco made by the son of leading Philippine tycoon Henry Sy and will see its holdings in the power distributor increase to about 19.7% as a result of the deal.
The acquisition cost translates into Ps300 per share, which equals a 36% premium to Meralco's close at Ps217 yesterday. The share price has rallied 17.5% this week in the wake of the bids, however, and the premium versus last Friday's close is a hefty 60%. At Ps300 per share, MPI will also be paying 138% more than what it paid for its initial investment in Meralco that was agreed in March this year. Meralco's share price has just about doubled since then, however.
The deal should effectively end the fight for control of Meralco that has been going on for about a year, and which has pitted two of the most powerful business groups in the Philippines against one another -- the Philippine Long Distance Telephone (PLDT) group, which is controlled by Manny Pangilinan and includes MPI, and San Miguel Corp, the food, beverage and packaging group, which is the exporter of the Philippines most popular beer.
Henry Sy Jr is a business ally of San Miguel president Ramon Ang and if he had succeeded in buying the 13.4% stake, it would have given San Miguel absolute control of Meralco. According to a Reuters report, the group has previously said that it and its allies own about 43% of the electricity distributor.
PLDT and MPI, which are both controlled by Hong Kong-listed First Pacific Holdings, are allies of the Lopez family, which has been involved in Meralco for close to 50 years. The Lopez's initially brought in the PLDT group as a white knight to help it retain control of Meralco after the Philippine government sold 27% to the San Miguel group in October 2008 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 Meralco, compared with the 34% owned by the Lopez family through its group holding company, First Philippine Holdings.
PLDT bought a direct 20% stake in Meralco from FPH in March this year, and a further 10.17% through PLTD's employee retirement fund (the Beneficial Trust Fund, or BTF) in the open market around the same time. The BTF stake was later sold to MPI. It was in connection with this acquisition that the PLDT group obtained the right of first refusal that it used to secure yesterday's deal. PLDT also had tag-along rights with regard to any bid for control by the San Miguel group, but chose not to be tempted by the opportunity to cash in what would have been a huge profit on its initial investment and instead increase its position in Meralco.
Together with FPH's remaining 13.4% stake, the March acquisitions gave Pangilinan and the Lopez's a bit more than 44% of the vote in Meralco. However, if the younger Sy had been successful in his bid this week, the San Miguel group and its allies would have ended up with more than 50%. About 9% of the shares in the Manila-listed company are held by minority investors without affiliations to either group.
Meralco has become an attractive target after regulators allowed it to raise power tariffs by up to 27% this year, its first hike since 2003. The company 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. The asset fits well into MPI's growing portfolio of infrastructure assets, which also include water, toll roads, hospitals and the concession to operate the North Harbour in Manila, which it obtained together with a partner last month.
"We are very happy with the agreement reached with Mr Pangilinan's group. It reflects a valuation that shows the strong growth prospects of Meralco. The proceeds, no doubt, will allow First Philippine Holdings to pursue its new directions and further establish itself in the country as the premier renewable energy provider," FPH's chairman and CEO, Oscar Lopez, said in a statement issued by FPH following the board meeting.
To ensure that the deal will go ahead, MPI will make a short-term secured loan to FPH, corresponding to half the acquisition cost, or Ps11.2 billion. The loan will be in the form of a promissory note with an annual interest rate of 5% that will mature on March 31, 2010.
At the same time, MPI gets a call option to buy 74.7 million common shares in Meralco, corresponding to the 6.7% stake, which can be exercised at any time before March 31 next year. The deal is expected to include some form of agreement that will prevent FPH from selling its remaining shares in Meralco for a certain period of time, probably several years.
MPI is expected to pay for the acquisition with a combination of internal resources and debt. The company last month raised $261 million from a follow-on share sale, of which approximately $125 million was used to pay for its initial 13% stake in Meralco (aside from the shares it bought from BTF it also acquired a 2.8% stake from its parent company Metro Pacific Holdings). The $125 million represented about one-third of the total acquisition cost of Ps18.2 billion ($375 million), while the rest was settled through the issuance of new shares to BTF and MPH.
Meanwhile, First Pacific is in the process of raising at least $282 million from a rights issue and some of that money may be directed towards the Meralco share purchase. When the rights issue was announced in mid-October, Pangilinan, who is also managing director and CEO of First Pacific, said that some of the proceeds may be used for investments in infrastructure assets in the Philippines "if suitable opportunities arise".
Evercore Partners, a US boutique investment bank specialising in M&A and restructuring advisory services, acted as the exclusive financial adviser to FPH. This was Evercore's first Asian transaction after it decided earlier this year to make a move into the region. In mid-August it hired Stephen CuUnjieng, who at the time was a senior adviser with Macquarie, to be its man on the ground. CuUnjieng is a Filipino native and has an extensive track record when it comes to advising the country's most prominent families on M&A and capital markets transactions. While still at Macquarie he advised the Lopez family on the sale of its initial 20% stake in Meralco to PLDT.
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