Metro Pacific Investments (MPI) is kicking off a long-planned, fully marketed share sale today to raise money to pay for its acquisition of a 13% stake in Manila Electric Co (Meralco), which was first announced in March, and other potential expansion project in the pipeline.
According to a source, the Philippine investment company which focuses on infrastructure assets, is seeking to sell $200 million worth of shares with an upsize option of $100 million and an overallotment option of 15% that could take the total fundraising to $345 million.
The shares will be offered at a price between Ps3 and Ps3.75 apiece, and the total number of new shares to be issued will depend on the final price.
Aside from raising money to pay for the Meralco shares, the follow-on will be an important liquidity event for MPI, which currently has a free-float of only 2.7% and a turnover of less than $200,000 per day, according to data on the Philippine Stock Exchange website. Depending on the final issue price, the sale of new shares will account for between 18% and 22% of the existing share capital and as a result will push the free-float above 20%, meaning the deal will essentially be a "re-IPO" of the company, offering institutional investors the first real chance to make a meaningful investment into the company.
These types of re-IPOs were common in the Philippines in 2006-2007 when companies like Alliance Global Group, Union Bank of the Philippines, Rizal Commercial Bank Corp, Filinvest and Robinsons Land significantly boosted their free-float through new equity issues.
Having previously not even been eligible for inclusion into the investment portfolios of large foreign funds because of the illiquid nature of their shares, these Filipino companies were suddenly on the radar screen of big international asset managers and most of them received a share price boost as a result.
MPI's share price has performed well this year, however, as it has been pushed higher in anticipation of a significant boost to net asset value and earnings from the Meralco acquisition, as well as other potential infrastructure investments. Friday's close of Ps5.70 and market capitalisation of $1.1 billion is more than double the levels where it began the year. However, sources say the lack of liquidity has exaggerated the movement and today's share price is not a true reflection of the actual value of the company -- in fact, few investors would be willing to buy at the stock at near Ps6 per share. Consequently, the share sale is being offered at a sizeable discount of 34% to 47% versus the latest close.
Among MPI's other potential infrastructure investments are the concession to operate the North Harbour in Manila. MPI, who is partnering with Harbour Centre Port Terminals, is the only pre-qualified bidder for this asset, and analysts say this looks likely to become MPI's sixth infrastructure investment (so far its interests range from water and toll roads to hospitals). The source also notes that the company intends to increase its current 5% stake in the skyways toll road in the south of the country.
MPI is buying 144.385 million Meralco shares from two different entities -- a 10.17% stake from the Beneficial Trust Fund of the Philippine Long Distance Telephone Co (PLDT), which is a retirement fund set up on behalf of PLDT's employees; and a 2.79% stake from MPI's parent company Metro Pacific Holdings -- for Ps126 per share. PLDT and MPH are both controlled by MPI's ultimate owner, Hong Kong-listed First Pacific.
The Beneficial Trust Fund (BTF) bought the 10.17% stake in Meralco in March this year for Ps10.3 billion, at the same time as PLDT acquired a 20% stake from the Lopez group. Their combined staked enabled them to act as a white knight, preventing the San Miguel group from taking control of the manila electricity distributor.
MIP will pay about one-third of the acquisition cost, or Ps6.1 billion ($125 million), in cash, while the rest is to be settled through the issuance of new shares to BTF and MPH at Ps3.50 per share, resulting in a total acquisition cost of about Ps18.2 billion ($375 million). BTF and MPH will be compensated through the issuance of additional shares, if the price of the current share placement is below Ps3.50 per share.
Meralco is the largest power distributor in the Philippines with about 4.5 million residential, commercial and industrial customers. It also operates a 1,000-kilometre fibre optic network through its e-Meralco Ventures unit. In the first half of this year, it reported a core net profit of Ps716 million ($15 million), versus a restated Ps15 million in the same period 2008. Including net non-recurring gains, the 1H09 profit increased to Ps1.7 billion against Ps339 million a year earlier.
In a statement to the earnings, MPI chairman Manuel Pangilinan noted that the first half results yielded higher revenues across all of MPI's businesses.
"The group's strong financial position raised our level of confidence and prospect for our latest guidance number. We are therefore prepared to raise our guidance core income for the full year 2009 to Ps1.5 billion, compared with our earlier core income guidance of Ps1.2 billion," he said, adding that the impact of the Meralco investment hasn't yet been factored into that guidance number.
In a report issued earlier this month, CLSA analyst Raffy Manalaysay estimated that Meralco will account for more than one-third of MPI's earnings by 2010 and will together with a potential tax holiday for Manila North Tollways Corp, result in a compound annual growth rate of 85% in MPI's net profit from 2009 to 2011.
When the acquisition was first announced in March, MPI's president and CEO, Jose Ma K Lim, said the possible operational synergies involving Meralco's subscriber base, accessible data centres, wireless bill payments and other economies of scale will enhance the customer service response and speed up the coordination systems within the group.
MPI is also expected to enter into some form of joint venture with Pilipino Telephone Corp (Piltel), which is an indirect subsidiary of PLTD and holds the 20% stake that PLTD bought in Meralco, thus creating opportunities for further synergies and giving the group significant influence over the Manila electricity generator.
CLSA is acting as sole global coordinator for the share sale, and is also joint bookrunner together with UBS.