You can’t fault Manny Pangilinan for his drive and determination. The chief executive of Hong Kong-listed First Pacific has had plenty of ups and downs since he founded the company 30 years ago, and is variably described as a savvy dealmaker by his fans and a burly risk-taker by his detractors. The last time the chips were down was some nine years ago when heavy debt and a region-wide recession threatened to topple the empire of disparate businesses that Pangilinan and his boss, Indonesian tycoon Anthony Salim, had amassed after the 1997 financial crisis.
First Pacific’s stock was being punished for the high price that it had paid for some of its assets in the Philippines and Indonesia, and a boardroom tussle was underway over which assets should be sold.
In the end, Pangilinan managed to hold on to his beloved Philippine Long Distance Telephone Company (PLDT), which he had bought from the government in 1998 when the country was being run by President Joseph Estrada.
(Pangilinan had supported Estrada, but switched political alliances in 2000 when the corrupt president was impeached.) The compromise for Pangilinan was to give up his sprawling Fort Bonifacio real estate project on the outskirts of Manila. He paid more than $1.5 billion for the land in 1995, then sold it to rival Ayala Land in 2002 for a fraction of the price. While the clean-up put First Pacific back on a more firm footing, analysts said at the time that the company was running low on ideas to remedy its cashflow situation.
Jump forward to the current day and cashflow is no longer a problem. PLDT, through investment in its Smart mobile business, has made a comeback — reporting a profit of Ps40 billion ($920 million) in 2010 versus a loss of Ps16 billion in 2002.
But the real success story has been the resurrection of Metro Pacific — the Philippine holding company that once owned the Fort Bonifacio asset. In 2006, Pangilinan started a new company called Metro Pacific Investments Corporation (MPIC) and invited shareholders in the old property business to switch to the new entity.
During the next two years, MPIC bought a controlling interest in Maynilad, which holds an exclusive water concession covering 9.5 million people in metro Manila, and began to build a portfolio of hospitals and medical centres. In March 2009, the company bought a stake in electricity distributor Manila Electric Company (Meralco) and then, in September of that year, completed a re-IPO on the Philippine stock exchange, increasing its free-float to 40% and raising $300 million to pay for a further round of Meralco shares. MPIC also owns toll-road assets including the North Luzon Expressway and the Subic Clark Tarlac Expressway.
The focus on infrastructure has come at an opportune time in the Philippines where the new government under President Benigno Aquino III has pledged to improve the country’s ailing public works by encouraging private MPIC buys underperforming assets and turns them around with a mix of financial engineering and improved operational efficiencies investment. MPIC’s strategy is to buy underperforming assets and turn them around with a mix of financial engineering and improved operational efficiencies. In many ways, it’s a private equity model, except the policy so far has been to buy-and-hold.
“One of our key selling points is that we are a pure infrastructure play,” said David Nicol, chief financial officer of MPIC, who spoke to FinanceAsia on the eve of a non-deal roadshow to New York where he planned to update investors on the company’s story. Nicol is keen to make it clear to investors that, unlike some of the Philippine conglomerates that have jumped on the infrastructure bandwagon (namely Ayala Corp and Aboitiz Equity Ventures), MPIC’s focus isn’t blurred by holdings in unrelated businesses such as banking, food production and car sales. “You either subscribe to the idea of a conglomerate or you don’t,” said Nicol. “Our investors want us to stay true to the infrastructure cause, and know that we aren’t going to wake up tomorrow and decide to buy a sugar business.”
So far, MPIC is proving its mettle as a value creator. In its 2010 full-year results, the company reported an increase in core net income of 88% to Ps3.9 billion, on revenues of Ps18.6 billion. At the subsidiary level, Maynilad reported an increase in core net income of 46% for the year, toll-road net income rose 20%, and Meralco profits rose 74% to Ps12.16 billion.
The boost in earnings at Meralco has been particularly spectacular considering that the government controls the price of electricity and, therefore, profits should be steady and predictable. But Meralco hasn’t always been able to make good returns from its distribution business. Back in 2007, when the company was owned by the Lopez family and the Philippine government, Meralco reported a net income of just Ps3.8 billion. “Our investors want us to stay true to the infrastructure cause, and know that we aren’t going to wake up tomorrow and decide to buy a sugar business” David Nicol, chief financial officer of MPIC Pangilinan obviously felt confident he could improve on these figures and has fought hard to maintain a meaningful stake in the company. His chief adversary has been the San Miguel group, which made its first play for Meralco in October 2008 when it bought a 27% stake from the government. Pangilinan was brought in as a white knight by Lopez-owned First Philippine Holdings (FPH) and acquired a direct 20% interest in March 2009, followed by a further 10% on the open market. But, in September of that year, San Miguel was back on the scene, hoping to take its control above 50% through an offer — made by Henry Sy Jr, the son of the shopping mall tycoon and a San Miguel ally — for FPH’s remaining stake. MPIC stepped in with a generous counter-bid, agreeing to pay Ps300 per share for another 6.7% of the company a price nearly 140% higher than what it paid for its initial investment in March.
As a group (including shares held by PLDT), Metro Pacific now has an economic interest of some 45.5% in Meralco, while San Miguel owns 37%, the Lopez group 6% and about 10% is listed on the Philippine Stock Exchange.
Nicol doesn’t expect Metro Pacific’s holding to go above its current level, nor does he expect Meralco to be able to squeeze further large gains from supplying regulated electricity. “The next leg in our strategy is to use our cashflow to seed new power generation projects,” said Nicol. The long-term target is to build power plants with total capacity of 2500MW. It has already announced the building of a 600MW coal-fired plant in Luzon, and another 900MW in projects is under evaluation.
Metro Pacific is hoping the move into power generation will boost earnings and help to justify the Ps300 per share paid for its final stake in Meralco.
Analysts in Manila put the stock’s fair value at around Ps230. “There was a lot of negative sentiment around the price we paid for these shares, but we always look at the all-in cost of our Meralco holding, which is about Ps190 per share, and this puts us ahead of the game,” said Nicol. “In fact, the same can be said for all of our assets that are now valued at significantly higher net present values than what we paid for them.”
Nicol said there are still incremental gains to be made in most of the business units. Maynilad, for example, will see revenues grow as it reduces leaks in the system and adds new customers. “There are about 2 million people who live in our concession area that aren’t yet served,” he said.
The firm’s most ambitious expansion plans are in toll roads. Work has already begun on an 8km extension to the North Luzon Expressway at a cost of Ps8 billion, and Metro Pacific is the frontrunner in a bid to build a 13.5km road that will join the North Luzon Expressway with the South Luzon Expressway, at a cost of Ps17 billion. The company has another two projects on its radar, worth over Ps22 billion.
Nicol said his biggest challenge is being ready to finance new investments when they come along. The company’s strategy is to tap the debt markets on an “as-needed” basis, despite pressure from bankers to issue when conditions are favourable. “We don’t want to raise debt unless we have something to buy, otherwise the money sits on our balance sheet and incurs a negative carry, which, after a while, erases all the gains we might have made from issuing in an opportune window.” With a net-debt-to-equity ratio of 0.09 times at the parent level, the company has room to increase its gearing, and, for a large acquisition, it might also issue equity. “Our preference would be to buy an asset first, make some improvements, and then bring in an equity partner when the value of the asset is higher,” Nicol added.
As its portfolio of investments matures, MPIC may be tempted to diverge from its buy-and-hold policy.
“We might decide that it makes sense to harvest some of our gains by selling down a piece and using the proceeds to invest in a new opportunity where we can build more value,” said Nicol. Plans have already been hatched to diversify its asset mix, with MPIC announcing its intention to bid for the LRT-1 and MRT-2 railway privatisation, and a feasibility study underway on an airport in Clark.
The downside of selling assets to invest in new projects is that dividend payouts will stay depressed. Metro Pacific’s shares currently pay a yield of just 0.7% because most of its free cashflow is being channelled towards building new toll roads. The dividend is low compared to what other infrastructure holding companies pay, and while Pangilinan has indicated that he would eventually like to see 25% of cash returned to shareholders, this isn’t likely to happen while toll roads are under construction, and while Maynilad remains cashflow negative.
At some point investors will want the newly resurrected MPIC to display its adult plumage; coming to a decision on whether it is a holding company that pays a handsome dividend or one that churns assets once value has been created. This second strategy carries an amount of construction risk and a need to borrow from the debt markets.
Mindful of his past financial difficulties, Pangilinan is treading carefully.
This story was first published in the July 2011 issue of FinanceAsia magazine.