Infrastructure-to-real estate conglomerate Metro Pacific Investments raised P12.7 billion ($256 million) from a placement of shares in Manila Electric (Meralco) through an overnight block sale on Tuesday.
But Metro Pacific will use the funds for an upcoming acquisition that will see it restore its stake in Manila Electric, the Philippines' biggest power supplier – albeit in a roundabout way.
Sources said the 50.7 million-share deal was fully covered within an hour of launching late on Monday afternoon, and the shares were eventually placed to about 30 investors in a fairly tightly allocated book. About 85% of shares went to the 10 biggest accounts, which included both existing shareholders and new investors.
The Reg 144A / Reg S offering was launched at a fixed price of P250 per share, representing a 6.5% discount on Manila Electric’s P267.4 Tuesday close.
The deal got traction from investors because it was the first internationally-marketed block sale of shares out of the Philippines since GT Capital’s $172 million block trade in August last year, offering them a rare opportunity to increase exposure to a stock market that has gained 16% so far this year.
It was also the biggest secondary offering of shares out of the country in nearly two and a half years following Ayala Land’s $350 million placement in January 2015.
But above all, it was the acquisition angle attached to the deal that investors are most comfortable with. One fund manager commented that investors are more willing to support equity fundraising for acquisitions because they can potentially increase the company’s value in the long term.
Sources familiar with the situation say the equity-cum-M&A deal is an example of how a company can minimise risk by customisation and applying a unique structure.
Technically speaking, the transaction is structured in a similar way to a top-up placement, through which a company sells existing shares before subscribing to an equal number of new shares.
In Metro Pacific’s case, the company sold Meralco shares ahead of an acquisition that will see it restore nearly the entirety of that stake. The only difference is that Metro Pacific will buy existing shares instead of new shares, so there is no dilution of interest for other shareholders.
According to Metro Pacific, proceeds from the share placement will be used to fund the purchase of the remaining 25% stake it does not already own in Beacon Electric, a 75/25 joint venture with Philippine Long Distance Telephone (PLDT), the country’s largest telecommunications services provider.
The company has said it will settle the $563 million acquisition with $343 million of cash up front and the remainder by installments over the next four years.
By acquiring Beacon, Metro Pacific will take control of a 56% stake in Global Business Power, an independent electricity distributor in central Philippines with 852 megawatts of power generating capacity.
However, since Beacon also owns a 35% stake in Meralco, the acquisition would have indirectly increased Metro Pacific’s stake to 45.5% from 41.2% and potentially reduced Meralco’s free float.
Metro Pacific is clearly not interested in accumulating more Meralco shares at this point, and therefore moved early to sell the incremental shares before completing the acquisition.
By selling Meralco shares early, Metro Pacific has avoided the uncertainties inherent in waiting until the acquisition is closed, by which time market conditions may make it difficult to execute the block.
From a financing perspective, the block trade allows Metro Pacific to raise funds for the acquisition without dipping deep into its cash reserves. This is important since it has only $338 million of cash according to its latest financial statement, which falls short of the estimated initial cash payment of $343 million.
That suggests it might have had to resort to short-term financing, which would have pushed up the overall cost of the acquisition, if it had not taken the share sale route.
After the block trade, Metro Pacific's stake in Meralco is down to 36.7%; after the Beacon acquisition it will own 41% – just a shade below its pre-deal holding of 41.2%.
UBS was the sole bookrunner of the transaction.