As M&A deals go, the attempted sale of First Pacific's stake in PLDT to Philippine tycoon John Gokongwei has broken new ground in a number of economic and philosophical respects.
With Gokongwei's withdrawal, First Pacific has discovered a new form of equity - the type that the owner is not allowed to sell if the management so chooses. PLDT supremo, Manuel Pangilinan has managed to block the sale, and as such has taken on both the Salim family and the Gokongwei's - two of Asia's richest families - and apparently won.
The question now is: what next?
According to UBS Warburg research, First Pac is currently trading at a 50% discount to its net asset value, which even by the standards of conglomerates is hefty. While its interim results showed a profit of $15.6 million, the more amazing number is that for around $300 million (its market cap) you have a company that has a controlling stake in the major telco in the Philippines as well as the world's biggest noodle company. It is 45% owned by the Salims.
Its desire to reduce its exposure to PLDT (by going into effective JV with Gokongwei) was partly fuelled by a wish to reduce its debt levels, which on a consolidated basis stands at $1.75 billion. It is still talking to other parties, including private equity firms (rumoured to be Carlyle and Newbridge) about the sale of its stake in PLDT. The problem is that Gokongwei was offering a price of Ps1,131 a share, which is four times the current share price of Ps277.
Gokongwei would have been able to integrate PLDT with his own mobile phone operator, Digitel, and thus partly justify the price based on synergies. Likewise it would also have been a massive source of pride to him personally to control an asset as prestigious as PLDT. A private equity firm will have no such advantage or outlook and will have to base the valuation just on PLDT's future cashflows.
PLDT has $3.45 billion of debt, but it is improving its earnings - to an estimated Ps4.2 billion ($80 million) this year. It could be viewed as a growth story. However, anyone who comes in would have to take a knife to PLDT's bloated cost structure, in particular its 14,000 employees.
Any private equity investor would also have to have Pangilinan onside, and be sure he is willing to agree to just such cuts. However, given the "patriotic" nature of his recent defence, it might be difficult for him to shift his position too much in this respect.
And what does Manny want? Obviously this is not exactly clear. It is thought that he would be willing to do a deal with a private equity firm, although given what has passed, issues of face are clearly not to be trifled with. Any buyer would have to leave Manny in the top job, and probably incentivized.
Then again, whoever chooses to do a deal with Pangilinan faces a dilemma. Given his recent disregard for his current owner and employer (the Salims), a buyer would have to wonder whether Manny would do their bidding or not when it came to the crunch.
Some observers feel that victory on a personal level for Manny has come at a bigger cost. For while the recent debacle has highlighted some of the astounding shortcomings of the Philippine takeover code (First Pac was, after all, selling control without recourse to a general offer), the more fundamental point is that an equity shareholder has not been able to exercise its right to sell its stock, and this has left a deep impression on fund managers and external observers, for whom this is a fundamental principle of capitalism and free markets.
And it is showing. In August the turnover of the local stock market reached a nadir of $1.5 million on its worst ever day.