A great deal for who?

23 Jun 2017

LAST WEEK, Metro Pacific Investments (PSE: MPI) issued a press release announcing two separate but interrelated transactions. First, that it was acquiring the remaining 25% of Beacon Electric that it did not already own from PLDT (PSE: TEL) for P21.8 billion. An initial payment of P12 billion was paid in cash with the balance of P9.8 billion spread over four years. To finance this investment, the company also declared that it sold a 4.5% stake in Manila Electric (PSE: MER), equivalent to 50.7 million shares, for P12.675 billion or P250 per share. Separately, JG Summit disclosed a few days later that it bought 27.5 million of the 50.7 million Meralco shares sold by MPI, raising its interest by 2.44%. Reading and listening to various commentary, one would get the impression that it is a win-win deal for all parties involved. In my view, however, there is only one clear winner.

Given the tangled web of inter-relationships between a handful of listed companies that are potentially impacted by this deal, it will be instructive to review the chart below before proceeding to discuss the transaction in detail. The black lines represent the new ownership levels while the red lines were the old.

As a result of the changes shown above, Metro Pacific said that its economic interests in Meralco and Global Business Power Corp. (GBPC) increased by 4.24% and 14.59%, respectively. These changes are not obvious at first glance because of the highly layered ownership structure but we were able to validate these figures using our own calculations.

Some are saying that the deal is a win for MPI because it was able to sell a 4.5% direct stake in Meralco at P250 per share but was then able to buy an indirect stake of 8.74% at a lower price. Their computation is as follows:

On the other hand, others say that PLDT will be able to use the proceeds from the sale to reduce debt which would then result in lower financing charges of as much as P1 billion annually. The savings figure varies but the supposed bottom line is that this will add significantly to the company’s bottom line.

However, the calculation above treats the transactions entered into by MPI separately when they should be viewed in an integrated manner. This means focusing on the net effect of the company’s deals. Also, this computation fails to take into account the fact that Beacon likewise owns 56% of GBPC. Recall that Metro Pacific itself highlighted the fact that its economic interests in Meralco and Beacon increased significantly. In other words, the P21.8 billion should be considered as payment for both.

To show this more clearly, we first net out MPI’s proceeds from the sale of its 4.5% stake in Meralco from its cost to acquire Beacon and then divide the difference by the net additional shares which Metro Pacific now owns. This alternative calculated effective cost of P191/share of MER is now 24% lower than the P250/share private placement price and 28% below the stock’s closing price on the day prior to the deal. Still, this second computation does not take into account Beacon’s stake in GBPC.

In an earlier flurry of deals, MPI announced in May of last year that it acquired GT Capital’s 56% stake in GBPC for P22.06 billion. The implied valuation for 100% of GBPC at the time, therefore, was P39.4 billion. Knowing this, the value of the additional 14.6% economic interest acquired by Metro Pacific in last week’s transaction is P5.75B (P39.4 billion x 14.59%). This should be taken into account in arriving at the true effective cost of MPI’s additional 4.24% economic stake in Meralco. Finally, it should be noted that Beacon, as confirmed by management, has a net debt level of P11.28 billion. Apart from higher ownership levels in Meralco and GBPC, MPI also takes on 25% of this net debt. This is also taken into account in the calculation below.

What I have attempted to show in the preceding paragraphs is that in a very shrewd deal, Metro Pacific was able to increase its economic interest in Meralco by 4.24% for an EFFECTIVE COST of only P130 per share. This is 46% lower than the P250 per share private placement and less than half the price of MER prior to last week’s announcement. This makes MPI the true and ONLY winner. The market has not fully appreciated the impact of the deal but the benefits will accrue over the next few quarters and the stock price should also reflect this over time.

If Metro Pacific got a huge bargain with its purchase of Beacon, one can only conclude that PLDT got the raw end of the deal. Apart from effectively getting shortchanged, recall that the P21.8B is 17% lower than the P26.2-billion valuation for a similar 25% stake in Beacon which was sold (between the same parties) just last year. Also, TEL will give up equity earnings which is estimated to be around P1.7 billion annually. This is much higher than the expected interest savings and will thus result in earnings dilution of 2%-3% going forward. Given all these negatives for PLDT, yours truly can be forgiven for asking: why are some saying that this is a positive for TEL shareholders?

(Metro Pacific Investments Corp. is one of three key Philippine units of Hong Kong-based First Pacific Co. Ltd., the others being Philex Mining Corp. and PLDT, Inc. Hastings Holdings, Inc., a unit of PLDT Beneficial Trust Fund subsidiary MediaQuest Holdings, Inc., has a majority stake in BusinessWorld through the Philippine Star Group, which it controls.)

Views and opinions expressed in this piece are those of the writer’s and do not reflect the policy or position of BusinessWorld. This piece is for information purposes only and should not be construed as a recommendation, an offer, or solicitation for the subscription, purchase, or sale of any of the security(ies) mentioned.

Raymond “Nicky” Franco is a Certified Public Accountant and received his Chartered Financial Analyst (CFA) designation in 2000. He is the Head of Research of Abacus Securities and the head of its online trading arm, MyTrade (mytrade.com.ph).