Globe Telecom braves international equity investors

Filipino cellular operator Globe Telecom has begun roadshows for its innovative issue of Philippine Depositary Receipts (PDRs).

The roughly $100 million offering marks the first international equity offering from the Philippines since the last and to date only PDR issue by ABS-CBN last November.

Country specialists also believe that Globe is one of the few companies in the Republic still capable of attracting the attention of international fund managers. Says one banker. "If there's any deal from the Philippines that will go, this is it."

Led by BPI Capital Corp and Morgan Stanley Dean Witter, the transaction has three components comprising: an initial exchange of existing common shares into PDRs; a global offering of new common shares and; subsequent to the close of the transaction, an evergreen facility allowing for further conversion of common shares.

BPI Capital will lead the domestic exchange, which could potentially comprise a 17.6 million PDR float. Having opened this Wednesday, the offering will close on October 3, with the results to be announced two days later.

Morgan Stanley will lead the global offering, which will run concurrently and comprises 5.2 million PDR's on a one-for-one ratio. Co-leads are Jardine Fleming and ING Baring, with Credit Lyonnais, DBS and WI Carr as co-managers.

The new share issue matches the structure employed by ABS-CBN, with one key difference. Bankers say that whereas the latter classified as a PFIC (Passive Foreign Investment Company) with negative tax implications for US investors, Globe's PDR's will be considered equal to ownership of the underlying shares and will, therefore, be more attractive to US investors.

Similar to ABS-CBN, however, bankers also say that there is no precedent to price the PDRs at a premium to underlying shares since there will be dual fungibility.

The transaction will mark overseas fund managers' first chance to buy a stock which has risen 51.82% so far this year on the back of strong subscriber growth. Local law prevents foreign investors from owning more than 40 % of telecoms stocks and the quota is almost entirely filled at the moment by Singapore Telecom through its 39.07% stake. The company's other major shareholder is the Ayala group, which holds 44.21%.

Prior to the launch of the PDR offering, the company also completed a reverse stock split, whereby investors received one new share for every 50 held. According to local bankers, this was principally devised so that the company can prepare itself for a Nasdaq flotation next year.

Shares are currently trading at Ps835, down from a high of Ps915 earlier this month and up from a low of Ps500 last October. At these levels, the company has vastly outperformed the overall market, which is down 30% on the year, but is still said to be trading at a discount to DCF across all analysts' measures.

In terms of its digital capacity, the company is the Philippines' market leader and has a 58% market share, versus a 41% market share of the overall cellular sector. As of end July, the company had 1.8 million digital subscribers after adding 130,4000 over the first six months of the year.

Half year results showed revenue up to Ps8.4 billion, a 102% increase over the same period last year and almost equal to the whole of 1999's Ps9.4 billion. EBITDA was also up strongly, recording a 119% increase over the first half to Ps3.2 billion and again almost equal to 1999's EBITDA levels of Ps3.7 billion.

Future growth is also likely to be spurred by the company's merger with cellular operator Islacom, which will bring it new spectrum and a major new shareholder in the form of Deutsche Telekom. The arrival of the German telecoms operator has also necessitated a restructuring of the company's capital base so that it can accommodate two major foreign shareholders without breaching local regulations.

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

The common shares will then have a three way split, with Ayala, Sing Tel and Deutsche Telekom each owning 23.5%, subject to the issuance of the full 20.5 million new common shares filed for this May. Once the merger is complete early next year, PDR holders will then have the option to convert back into common shares.


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