The offering has drawn a lot of attention after Financial Secretary Margarito Teves announced last week that the Philippine government also intends to sell the remaining 40% of the company that it will hold after this transaction before the end of this year, resulting in a complete selldown from 100% to zero in 12 months.
The final 40% is likely to be sold either to a trade player or strategic investor, which adds a possible acquisition angle to the companyÆs already positive fundamental outlook that has helped the share price almost double since the IPO. According to Teves, the government is hoping to pocket Ps50 billion ($1.09 billion) from the sale of its current 60% stake in the company.
The optimism did cool somewhat yesterday, however, after Reuters reported that parent company Philippine National Oil Co (which is also controlled by the government) was planning to send a letter opposing the sale of the final 40% to the Department of Finance, noting that the divestment would mean the loss of about Ps600 million in annual income. Later in the day, the countryÆs energy secretary, who is also chairman of PNOC, gave his full support to the governmentÆs selldown plans.
PNOC-EDC is the largest producer of geothermal energy in the Philippines, contributing about 64% of the countryÆs total capacity of this environmentally friendly power source. It began operations at its seventh geothermal steam field last month.
The current offering will be done in the form of a fully-marketed global placement of up to 3 billion common shares currently held by government-owned PNOC. According to the term sheet guidance, the offer will be priced ôat or close to marketö.
CLSA, which also arranged the IPO, is the sole bookrunner for the offering.
The roadshow kicked off in Singapore on Wednesday this week and will also visit Hong Kong, London and the US before the deal closes on July 10. However, there is a chance the books will close early if the demand is deemed to be sufficient enough. According to sources the deal was 90% covered on the first day.
The placement comes less than a week after Aboitiz Power raised $218 million from a highly successful IPO of its own, which helped attract attention to the Philippine power sector. The power generator and distributor drew $575 million worth of demand from 57 accounts for the 70% international tranche, even though the final price valued the company at a 14% premium to Manila Electric Company (Meralco) and a 17% premium to First Gen, which are viewed as its two key comparables.
ôThere doesnÆt seem to be a shortage of money going into the Philippine power sector, thatÆs for sure,ö one observer notes.
PNOC-EDC too is currently trading at a slight premium to First Gen. Based on consensus forecasts for 2007, the latter is quoted at a price-to-earnings ratio of 12.2 times, compared with PNOC-EDCÆs 13.2 times. By comparison, Aboitiz was sold at a 2008 PE multiple of 14.8.
Since its listing in December, the geothermal energy producer has seen active trading with an average daily volume of about 33 million shares. At current prices that translates into a turnover of about $4 million. The share price more than doubled to a high of Ps6.60 in February from Ps3.20 at the IPO but has since eased back slightly. Yesterday it closed at Ps5.80 - 81% above the IPO price.
Despite the sharp gains, analysts still see value in the company as demand for environmentally friendly energy continues to grow. Philippine power producers are also cheaper than most of their peers in the region. The fact that this selldown will see the government lose its majority stake û its holdings will fall to 40% from 60% - should allow PNOC-EDC to become more efficient. For one, it should be subject to less bureaucracy and will no longer be required to operate marginal businesses that donÆt meet its targets for cost of capital and internal rate of returns.
In addition, the probability that it will be able to keep the electricity production plants that it is due to take over starting from this year is likely to increase as the governmentÆs say over the company decreases. The production plants are currently owned by independent power producers that are now its customers under 10-year Build, Operate, Transfer agreements. By the end of 2009, the company will have taken over about 500MW worth of electricity production capacity.
However, as government entities arenÆt allowed to own power generation assets (following a deregulation of the sector) it would eventually have had to sell these BOT plants. Electricity production has better margins than the sale of steam energy as the cost of operating the plants is lower than the current fees paid to the BOT contractors, so the takeover of the plants is expected to result in a boost to the companyÆs bottom line.
As a privately-owned company, PNOC-EDC will also be able to participate in government auctions of other power plants that are up for sale and according to sources it has expressed an interest in doing so.
Domestic investors will be able to participate in the sale, but it is principally being marketed to international investors. The company has a foreign ownership limit of 40%, but to get around that it has recently created a separate class of preferred shares which are held by PNOC and the PNOC-EDC retirement fund û both of which at least 60% owned by Filipino citizens. The preferred shares, which account for one third of the total share capital, are not listed. Similar arrangements are in place at many of the countryÆs largest companies, including First Gen, Manila Water, Megaworld, Globe Telecom and Philippine Long Distance Telephone.
Based on information in the listing prospectus, foreign investors currently own about 36.7% of the common shares, which suggests they hold just under 25% of the total share capital. Following this placement, PNOC will own 47% of the total share capital, PNOC-EDC will have 13% and private investors (including domestic ones) will hold 40%.
The government reduced its stake in previously wholly-owned PNOC-EDC to 60% through the December IPO, which was the first privatisation in the Philippines in 12 years. The $383 million deal attracted more than 150 foreign investors and was priced at the top of the indicative range.
PNOC-EDC produces geothermal steam which it sells to National Power Corp. (Napocor) and to independent power producers who use it to produce electricity under the BOT scheme. As of the end of last year, the amount of energy it produces is enough for the production of 1,149 MW of electricity. The company currently contributes 18% of the countryÆs total power production.
In the first quarter this year, the company generated Ps5.09 billion ($111 million) in net sales and a net profit of Ps1.50 billion. This compares with net sales of Ps21.01 billion and a net profit of Ps6.78 billion for the full year 2006.
¬ Haymarket Media Limited. All rights reserved.
