First Gen sells assets to cut debt burden

The highly leveraged power generator raises $105 million by selling 60% of its hydro-power unit to affiliate EDC.
Philippine power producer First Gen Corp has sold a majority stake in its wholly owned hydro-power subsidiary to another one of its units, reaping total cash proceeds of about $105 million. The money will be used to pay down debt, a key priority for First Gen which is highly leveraged and has bridge loans of just over $410 million coming due next month.

Concern about its ability to re-finance this debt has kept the companyÆs share price under pressure and year-to-date the stock is down 75%, which according to Bloomberg makes it the fifth worst performer among the 32 stocks in the benchmark index. As of the end of June, First Gen had $820 million of current liabilities and $1.6 billion of long-term debt on its balance sheet, versus $1.2 billion of equity.

The use of asset sales as a means to raise cash is expected to become more common as the global loan market remains constrained due to the ongoing credit crunch that has made banks reluctant to lend both to one another and to companies other than their most solid clients. And while this transaction doesnÆt qualify as true M&A (since it is essentially a transfer of assets within the same group) it certainly fits in with the de-leveraging theme that is spreading around the world.

The Lopez family, which controls First Gen, two months ago sold its controlling interest in the North Luzon Expressway for $278 million for similar reasons, although that transaction also helped to re-focus the groupÆs operations on power generation.

According to an announcement filed with the Philippine stock exchange, First Gen will sell 60% of First Gen Hydro Power Corp, which operates the 112MW Pantabangan-Masiway hydroelectric power complex, to Energy Development Corp. First Gen bought a 40% controlling stake (it comes with 60% of the voting power) in EDC, the dominant developer of geothermal power projects in the Philippines, from the government in November last year û an acquisition that has put a lot of strain on its balance sheet (the $410 million worth of bridge loans dates back to this transaction) and which has also disappointed in terms of market performance with the share price having slid below Ps5 from the acquisition price of Ps9.

Until now, market participants have seen few catalysts that could change this negative trend, which has been at least partly underpinned by a perceived lack of growth opportunities. The hope is that the acquisition of First Gen Hydro will help lift EDCÆs profile and valuation by injecting an asset that not only allows the greenfield company to expand its focus beyond just geothermal energy, but which has growth potential as well.

ôThis is not just about adding 112MW of power. The reservoir means the hydro plant can expand without having to build a new dam and there will be internal organic growth over the next five years. So EDC becomes a company offering stability with growth rather than just stability, while keeping its green profile,ö says Stephen CuUnjieng, vice-chairman for Southeast Asia at Macquarie, which advised EDC on the deal.

He stresses that the deal, which is expected to close by the end of November, was done at a discount to EDCÆs EV/Ebitda multiple in order to make the acquisition immediately earnings-per-share enhancing for the buyer. Based on an Ebitda of $40 million, the EV/Ebitda multiple is about 6 times. EDC is said to be paying for the acquisition using cash on hand, although it does also have available credit lines that can be used.

Meanwhile, as a wholly owned entity, First Gen Hydro was being ignored from a market cap point of view, even though its Ebitda has improved since it was acquired by First Gen. By putting a value on it through this sale, it should help lift the valuation of First Gen as well. First Gen will also make a pretty good profit on these hydro power assets, which it bought in 2006 for $129 million. The current selling price implies an equity value of $175 million and an enterprise value of $240 million, meaning First Gen will make a 36% return on the 60% it is selling.

What is really neat about this deal though is that with First Gen also owning a big chunk of EDC this is a bit like having the cake and eating it û i.e. First Gen is still entitled to no less than 64% of EDCÆs profits.

First Gen Hydro fits nicely into EDCÆs business plan which is to promote renewable energy in the Philippines. This will be its first hydro asset, but the company is currently also developing a wind farm with a generating capacity of up to 86MW in Burgos, Ilocos Norte.

ôOur entry into hydro power clearly complements our portfolio and provides EDC with vast opportunities for growth,ö says Paul Aquino, EDCÆs president and CEO.

The market didnÆt exactly jump with joy though, although the transaction had leaked to local media last week and thus didnÆt come as a total surprise. It was also announced at a time of poor sentiment for equities overall and thus a significant gain was never really in the cards. As it were, First Gen fell 4.8% to Ps15 yesterday, while EDC dropped 5.7% to Ps3.30.

To alleviate the concerns related to this being a transaction between connected parties, EDC created a committee comprised exclusively of its independent directors to oversee the transaction on behalf of the management. The independent directors voted unanimously to approve the acquisition. The company also engaged Punongbayan and Araullo to provide a fairness opinion, while Macquarie Capital (Singapore) acted as the sole financial advisor.

First Gen was advised by J.P. Morgan.

Separately, the Philippine Daily Inquirer yesterday quoted the president of BDO Capital & Investment as saying that First Gen is "close" to reaching an agreement with its lenders on a $500 million loan to refinance the debt coming due in November. Reportedly, overseas banks will provide $350 million of the total, while Philippine banks, including BDO, will put up $150 million.
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