Globe circles international equity investors

Cellular operator Globe Telecom has mandated Morgan Stanley Dean Witter for an innovative issue of Philippine depositary receipts (PDRs).

The roughly $205 million transaction is likely to be launched within the next month and should serve the triple purpose of raising much needed funds for capex, allowing foreign institutional investors to hold Globe stock for the first time and prepare the fast growing company for a Nasdaq flotation.

Analysts take a very positive view of the move which not only represents the first international equity offering from the Philippines this year, but also only the second ever PDR issue following ABS-CBN's pioneering example in 1999. Other syndicate members are believed to comprise Credit Lyonnais, Jardine Fleming and ING Barings.

Says one Manila-based research head, "Initially foreign investors would have only had their first chance to own the stock in the first quarter of 2001 when the company's capital structure changes after the merger with Islacom is complete. This transaction is a great bridge to that, enabling foreign investors to get in now while the stock is still undervalued by domestic investors."

The PDR structure has been necessitated by local laws that prevent foreign investors from owning more than 40% of the company. At the moment, Singapore Telecom entirely fills the quota through its 39.07% stake. The company's other major shareholder is the Ayala group holding 44.21%. The remaining 16.72% is in free float.

The company's takeover of rival cellular operator Islacom, however, brings Deutsche Telekom into the equation and a consequent need to restructure the capital base so that both of foreign operators can maintain large stakes in the company without falling foul of current regulations.

A full merger between the two, however, needs Congressional approval, so instead, the tie-up has been devised via a share swap. Deutsche Telekom and partner Asiacom will swap Islacom shares for Globe, which will then purchase Islacom and merge the two entities at an operational level only.

As a first step, the company is proposing a reverse stock split, whereby investors will receive one new share for every existing 50 common shares held. The transaction was filed with the Philippines SEC about two weeks and has been devised so that the company will able to complete an ADR offering further down the line.

"It's essentially a marketing move and makes the equity base more manageable," says one observer. "At the moment were you to convert one Globe share into a US dollar amount, it would come out at about 40 cents."

This step will then be followed by the PDR transaction which has been structured under rule 144a and will comprise up to 12 million units, with one unit equalling one common share. Existing common stock holders will also be offered the option of converting to PDRs in a move that could create a further 13 million units according to local analysts.

Should a successful deal see Globe not only able to boost the price of its underlying shares, but also price the PDRs at a premium to underlying shares, local observers believe that it will come back later in the year with a further 8 million PDR transaction to raise funds for capex. This will boost the free float from its current 16.6% level to 30%.

Under the new capital structure being put in place after the merger with Islacom, however, the company's common shares will only account for 35% of its equity base. The remaining 65% will consist of new preferred shares, 83% of which will be owned by local company AsiaCom, one of Islacom's two current owners. AsiaCom will in turn be 60% owned by the Ayala Corp, 20% by Singapore Telecom and 20% by Deutsche Telekom.

The common shares will then have a three way split, with Ayala, Singapore Telecom and Deutsche Telekom all owning 23.5% each, subject to issuance of the full 20.5 million new common shares filed for back in May. Once the merger is complete, PDR holders will then have an option to convert into common shares.

Bankers believe that Globe may be able to price the forthcoming PDR offering at a premium to underlying shares. "The company is undervalued," one argues. "Today (Thursday) it is trading at Ps15.25 per share, but according to our DCF (discounted cash flow) valuations, which are actually quite conservative, it should be trading at about Ps22 to Ps23." 

Profits have recently been surging on the back of huge cellular growth, which has seen the company triple its subscriber base in the space of a year. Currently the Republic's second largest cellular operator, it reported first quarter profits of Ps335 million ($8 million), a 52% increase over the same period last year. To keep pace with demand, the company's three major shareholders have recently indicated that they will boost capex investment over the course of 2000 up to $800 million to $1 billion.  

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