The mad, mad world of MVP

Alice in Wonderland noted that things were getting "curiouser and curiouser" the further she delved into the mad world through the looking glass. If she had happened to come to Asia in recent weeks, she would have found events equally bizarre.

The mad world of First Pacific, JG Summit, Metro Pacific, Fort Bonifacio Land, PLDT, NTT, Anthony Salim, John Gokongwei and above all Manuel 'Manny' Pangilinan (MVP), shows no sign of becoming any less strange.

The deal struck by Anthony Salim and John Gokongwei in a series of eight meetings after an April meeting in Beijing, is for Gokongwei's JG Summit Holdings and Salim's First Pacific to enter into a joint venture, two thirds in favour of JG Summit. This JV would then buy First Pacific's 24.4% stake in PLDT and 50.4% stake in Bonifacio Land, a deal valued at $925 million, or $616 million for Salim and First Pacific.

So far so good.

Enter Mr. Pangilinan, paid employee of Anthony Salim with the jobs of executive chairman of First Pacific, chief executive of PLDT and CEO of Metro Pacific, parent of Bonifacio Land. Pangilinan does not like the deal. But as chairman of the board of the company that is proposing it and CEO of the company, PLDT, that is opposing it, there would appear to be some kind of conflict. Not to Pangilinan.

On Monday, June 3, Pangilinan was forced in his role as executive chairman of First Pacific, to announce that his company was planning on entering into this deal and that First Pacific supported it. Minutes later, with his PLDT hat on he rejected the very same deal he had just himself announced.

Curiouser and curiouserà

Since then further oddities have emerged. First of all the PLDT board stated that it would deny First Pacific the access it would need to get the numbers for due diligence. Then on June 11, both Metro Pacific and PLDT had their scheduled annual general meetings. As PLDT employees picketed the hotel in Manila where the meeting was taking place, Pangilinan was saying almost nothing inside about the potential deals. The silence was deafening.

So at present the situation is that First Pacific and JG Summit have announced the terms of their potential deal, Pangilinan has said that it is not in the interests of PLDT shareholders or employees (although he has not said why), NTT is aware of the deal but have not said whether or not they will exercise their right to match the deal and rumours abound that Pangilinan will try to mount a management buyout of PLDT.

From an economic point of view, almost everyone agrees that First Pacific have struck a great deal for their shareholders. The implied valuation of the shares that First Pacific will be transferring into the JV is around Ps1,131 a share. The price that PLDT was quoted at when the deal was announced was Ps430. Thus First Pacific is monetizing 66% of its stake at a premium of almost 260%.

PLDT shareholders (not including First Pacific) are getting slightly less of a good thing. The deal does manage to circumvent Philippine takeover codes as the shares are being transferred to a new entity, not sold outright. This means that no general offer is being triggered by this move. So although First Pacific will be paid at the higher share price, common shareholders of PLDT will not. And since this deal was announced, the share price of PLDT has, curiously, fallen dramatically to below Ps400 - a seven month low.

The wisdom of bringing in Gokongwei is also questionable. First Pacific has lost a lot of money on PLDT. In 2001, for instance, it booked a $1.8 billion loss mainly due to its holdings in PLDT and Metro Pacific. Indeed in November 1998, when First Pacific bought its stake in PLDT, the share price was Ps1400, now it is just a third of that. Shareholder value has undoubtedly been destroyed.

But operationally PLDT is probably much stronger now that at any time since First Pacific took it over. In the first quarter of this year, net income increased by 107% over the first quarter in 2001, from P629 million to Ps1.3 billion. Its coverage ratios are as good as at any time of First Pacific's ownership. Subscriber numbers have steadily increased, and the company was able to sell a $350 million bond in March.

Yet the share price has suffered due to PLDT being a heavily indebted telecom stock in South East Asia û not the flavour of the month for any investor. Can Gokongwei change this? The answer is probably no.

Gokongwei is, however, known as a savvy, cash conscious operator. It is expected that if he gains control of PLDT he will slash the company's work force down from its present level of 14,000, according to bankers who know him well. Gokongwei so far has not said anything publicly about how he will run the company if he gets control.

It is the prospect of this job cutting that gives Pangilinan his strongest card. Public opinion will be crucial for this deal to go ahead. Regulatory approvals will need to happen, and public opinion has been known to sway the Philippine regulators.

One other tactic that Pangilinan has intimated he will use is the by-law of PLDT, which says that First Pacific cannot sell its shares to a company that is a direct competitor. As Gokongwei owns a small telecom firm called Digitel, the Pangilinan camp suggests that this means the deal cannot go ahead. However, curiously, First Pacific owned Smart Communications û which is now PLDT's mobile arm û when it bought into the company in 1998. This was the deal that Pangilinan himself brokered. So to denounce such a move now, when he saw through a similar deal, smacks of hypocrisy.

The key hurdles the deal now faces come from NTT and Pangilinan. NTT has the right to match any deal that JG Summit offers. Legal notification of the deal is going to Tokyo this week and the main protagonists, Salim, Gokongwei and the First Pacific board are trying to set up meetings with NTT to explain the rationale of the deal. This is likely to be a long and drawn out affair, as anyone who has ever dealt with the bureaucracy of a large Japanese company will testify.

But NTT does have the unquestionable right to match what Gokongwei has offered. Opinion is divided over whether NTT will or will not avail itself of its rights. Sources close to First Pacific and JG Summit are keen to point out that NTT has enough of its own problems without adding more from the Philippines. Other bankers say that NTT could match the offer and back Pangilinan. The definite decision is not likely to made for a few weeks.

Then there is the all-consuming question of what Pangilinan will do next. Rumours have been rife throughout the Philippine press that he is trying to assemble the finance for a management buyout. This should prove difficult. PLDT is mired in debt - $3.45 billion at the last count. Its main asset is Smart, its mobile arm, which does make good returns. But for the finance to come for a management buyout, either debt will have to be increased and secured on PLDT's cash flows, or assets such as Smart will have to be sold. Both these options are bad for shareholders of PLDT.

The last thing the company needs is more debt, and without Smart, PLDT has very little to offer any investor. So what is Pangilinan up to? Why is he so opposed to this deal? Without a concrete explanation from the man himself, one can only speculate (attempts to contact Pangilinan, PLDT and their advisers were unsuccessful).

In his various board positions he should be acting in the best interests of shareholders of First Pacific, PLDT and Metro Pacific. However, its looks as if he is acting in his own best interests. A case perhaps of management forgetting who actually owns the company.

The reason could perhaps lie in the fact that the role of chairman of PLDT is a very big position in the Philippines. A lot of cache, face and respect come with the job. This is perhaps why Gokonwei is also so keen to get involved in a mucky fight for the position.

Officials at First Pacific are quick to downplay the notion that they and Pangilinan have irrevocably parted. "People are making too much of there being a conflict between Manny and us" said Ron Brown, executive director of First Pacific. "He has accepted that there is a conflict."

However, according to other insiders at the company, Pangilinan's position has been clear for some time. On April 5th this year, Salim laid out the shape of the proposed deal to the other directors. According to people who attended that meeting, Pangilinan's first statement after the cards we laid out were: "Can you help me save face? Can I get another six months?"

One other curiousity that has emerged is Pangilinan's previously very public disavowal of ever considering doing a management buyout (MBO). On November 16 2001, he issued a statement after new reports suggested that he was doing an MBO of Metro Pacific. "There is absolutely no truth to this rumour," he said. "I am not part of any management buyout and I have no intention of ever putting myself across the table from First Pacific in this or in any transaction." How things change, time will only tell.

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