Crossed wires continue in PLDT debacle

First Pacific''s attempt to sell its stake in PLDT is nearly as complicated as the telco''s ownership structure.

The war of words for control of PLDT has been hotting up over the past week.

With 54% of the company held by the public, both sides in the dispute are anxious to 'spin' the situation to their advantage and sway the votes.

Historically, Asian M&A has been characterized by friendly chats behind closed doors by tycoons, ending with a fait accompli that other shareholders have little choice but to accept. When Anthony Salim agreed to sell First Pacific's stake in PLDT to John Gogongwei's JG Summit it looked to be a transaction of just that ilk. However, everyone was surprised when Salim's right hand man of 21 years, Manny Pangilinan executed the greatest defection since Britain's Kim Philby.

Pangilinan, as chief executive of PLDT, opposed the deal and got the board of PLDT to declare that the deal was not in the interests of all PLDT shareholders. Legal action ensued in the US with PLDT filing a suit against First Pacific (which controls a 31% voting interest in PLDT), in what is surely the first instance in Asian history of a company suing its own major shareholder. PLDT stopped giving First Pacific access to its financial information.

Three issues are now at stake. One is the technical ability for First Pacific to sell its stake; a dispute which involves the takeover code and a debate over the complex holding company structure that sits atop PLDT. Second is a spat over whether Pangilinan's track record as a manager is better than Gokongwei's û ie who is more fit to run PLDT. Third is the strange debate over who exactly is trying to buy the company. JG Summit, which owns rival telecom operator Digitel, had previously told the Philippines SEC that it was not involved in the sale and the board has never met to approve it.

But this took a new turn yesterday (Monday) with the release of a MOA (memorandum of agreement) to the Philippines SEC following the forced submission of the preliminary sale agreement to the US SEC after a legal victory by PLDT. In his covering letter to the Philippines regulator, Gokongwei writes that, "any reference to JG Summit Holdings was purely descriptive in nature and was not intended in any manner to make JG Summit a party to the MOA."

JG Summit is, however, mentioned throughout the MOA. And indeed, on the very first page, it says that the MOA is between 1) First Pacific and 2) The Gokongwei group and JG Summit Holdings, "a corporation organized under the laws of the Philippines with address at c/o 43Fl Robinsons Equitable Tower, ADB Avenue corner Poveda Street, Ortigas Center, Pasig City, Philippines." As descriptions go, this one is pretty thorough.

Below is a diagram FinanceAsia of PLDT's elaborate shareholding structure:

PLDT Chart

The key box here is PTIC, or the Philippines Telecom Investment Corporation. This is 54%-controlled by First Pac via two holding companies (MPAH and LBV). The other 46% is controlled by PHI, or Prime Holdings Investments.

The PLDT camp are sending out signals that this latter vehicle is controlled by Tony 'Boy' Cojuangco, an ally of Pangilinan. Under the PTIC shareholder agreement, he is reckoned to have first right of refusal on any stock of PTIC should First Pac wish to sell it û which is important, given PTIC controls 15% of PLDT. Thus, goes the argument, First Pac can't sell its stake to Gokongwei without first giving Cojuangco the right to buy it first.

The First Pac camp contests this point. For a start, no one knows who owns Prime Holdings. People who have variously claimed to control it û apart from 'Boy' Cojuangco û include the illustrious Imelda Marcos and Alfredo Yuchengco, a former PLDT chairman who is currently the Philippine ambassador to the United Nations.

Then again, it actually doesn't matter who owns Prime Holdings, according to the First Pac version of events. That's because what is being sold in the deal with Gokongwei is control of MPAH and LBV, the holding companies that own a combined 54% of PTIC. That means no 'actual' stock in PTIC is changing hands, and thus the first right of refusal clause is not triggered. MPAH and LBV will still control 14% and 40% of PTIC respectively.

Such go the niceties of clever corporate finance in Manila. However, somewhat more ideologically-charged is the subject of whether the deal should invoke a general offer under the Philippine takeover code.

A couple of years ago, the Philippine Senate ordained that if an entity buys 15% of a listed company it has to make a general offer to all shareholders at the same price.

Obviously this deal would trigger the 15% level, but JG Summit is not planning to make a general offer. It only wants to buy First Pac's 31% stake and pay Ps1,131 for it (a premium of 260% to the last closing price of PLDT stock before suspension).

And yet it gets more complex. Last November, the Philippine SEC issued a decree designed to boost M&A activity in the Philippines. In a somewhat ambiguous statement it said that no general offer need be made if a 35% stake was bought in the next 12 months.

Obviously this deal is for less than 35% and is thus exempt from a general offer.

It gets weirder, however. Section 19 of the takeover code says the code is only relevant to "equity securities of a listed company". By the letter of the law shares in an unlisted holding company do not constitute a transfer of the equity securities of a listed company. That means shuffling the ownership of unlisted holding companies (such as MPAH and LBV) does not invoke the takeover code - even though it may lead to a change of control of a major listed entity.

From any thinking person's point of view this is farcical, but if the Philippine takeover code is poorly drafted, that is hardly First Pac's or JG Summit's fault.

The PLDT camp retorts that what is happening here is a proxy contest or a 'poor man's hostile', as it is known in the US. This is thus an acquisition of control by stealth. Gokongwei must persuade enough investors to vote their stock with him (66% at a general meeting) to reconstitute the board.
Currently, PLDT's board has 13 directors of whom two are from Japanese telco, NTT (which owns 15%), six are from First Pacific (an amusing irony is that none of them seem to know this) and five are independents. Gokongwei's goal is to place six of his own people on the board in the place of First Pac's rebel directors, as well as CEO, Pangilinan.

How to get to this 66%? Well, NTT's 15% is one key. However, the other major shareholder is Capital, which has 12%. Given that Capital also owns 15% of First Pac (the Salims own 43%), it would logically be in their interest to vote on First Pac's side as this deal is very good for First Pac.
If we assume this to be the case that gives the First Pac/ Gokongwei camp, 43%. It needs 66% of the votes of those present at a general meeting to have its way. Given that the average turnout at a general meeting only normally accounts for around 70% of the total share capital, that suggests that if it controls 46.66% of the vote on the day it will succeed.

Even the PLDT camp must recognize that this should be easily achievable.

The tactic that has been thrown up in the meantime is a sort of phony-war, face-off in which both sides disparage the others management track record by pulling data off Bloomberg terminals.
One chart FinanceAsia was shown displayed the poor performance of Gokongwei-controlled companies. It showed that since March 1997 Robinson Land was down 63%, Universal Robina down 67%, Digitel Telecom down 69% and JG Summit down 75%.

This was accompanied by charts that showed that JG Summit was trading at a price to book discount of 81%, Universal Robina of 61%, Digitel of 64% and Robinson Land of 64%.
On the other hand, another chart we saw showed that since November 1998 (Pangilinan-controlled) PLDT's stock was down 67.9% while JG Summit was up 4%, Universal Robina up 43.8%, and Digitel only down 26.7%. Moreover in the past three years shareholders had received cash and stock dividends from JG Summit, Universal Robina and Robinson Land and meanwhile got zero dividends from PLDT.

Moreover, the argument is put forward that Gokongwei - via Digitel - has proven a better manager of a telco. In the Luzon area where Digitel operates, it has a 46% market share versus PLDT's 40% and has a lower capex per subscriber.

One thing is certain - with the level of acrimony this situation has now created, the war of words will only increase.

But if the truth be told, barring an out-of-the-blue legislative ruling (not a totally out-of-the-blue possibility in the Philippines) it looks like First Pac and JG Summit will get their way when a meeting is finally called. And those PLDT directors who claim to be exercising their fiduciary duty on behalf of all shareholders and not just First Pac, will be forced to resign.

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