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Lopezes to sell 20% of Meralco to PLDT

PLDT, San Miguel to fight for control

By Elizabeth Sanchez-Lacson, Doris Dumlao
Philippine Daily Inquirer
First Posted 00:57:00 03/14/2009

Filed Under: Mergers - Acquisitions - Takeovers, Electricity Production & Distribution, Telecommunications Services, Distillers & Brewers

MANILA, Philippine ? The Lopez family has agreed to sell most of its stake in the Manila Electric Co. (Meralco) to a unit of the Philippine Long Distance Telephone Co. (PLDT) in what is believed to be an attempt to block a hostile takeover bid of the country?s largest distribution utility by the giant San Miguel Corp.

The Lopez group?s First Philippine Holdings Corp. announced Friday it had forged an ?alliance? with PLDT by selling 20 percent of Meralco for about P20 billion to Pilipino Telephone Corp. (Piltel), PLDT?s second wireless phone unit.

This means that the Lopez family whose majority stake in Meralco once formed the nucleus of the group?s power empire will retain only 13.4 percent once the transaction is completed within the third quarter of 2009.

The deal is expected to set the stage for a fierce battle for control of Meralco between the PLDT, telecommunications giant led by Manuel V. Pangilinan, and San Miguel, the food and beverage conglomerate headed by Eduardo Cojuangco.

San Miguel, which is diversifying into infrastructure and heavy industry, has built up a large holding in Meralco since initially buying a 27 percent stake in October, acquiring key boardroom and management representation. It has also marshaled some allies to acquire more shares in the power utility.

San Miguel controls 38%

San Miguel has voting rights representing 27 percent of Meralco that it had acquired from state-run pension fund Government Service Insurance System last October. Combined with the voting rights of its allies, San Miguel is estimated to have control of at least 38 percent of Meralco.

PLDT, the country?s dominant phone firm, may be fortifying its hold on Meralco ahead of San Miguel?s planned venture into wireless broadband and mobile phone services via a partnership with Qatar Telecom.

?The acquisition of a stake in Meralco constitutes a strategic investment for the PLDT group that could lead to significant opportunities for operational and business synergies and result in new revenue streams and cost savings for both organizations,? PLDT said.

Smart-Piltel merger

With the Piltel purchase, the telecommunications giant?s stake in Meralco comes to 30.1 percent. The PLDT Beneficial Trust Fund, the benefit pension plan for PLDT employees, earlier snapped up a 10.1 percent stake by buying shares from the open market as well as from Meralco?s retirement fund.

Piltel will acquire 223 million shares in Meralco at P90 per share, the same price that San Miguel paid for the GSIS shares over a three-year installment.

The PLDT group also announced Friday it would consolidate the cellular phone operations of Piltel with Smart Communications Corp., the country?s largest wireless phone service provider. Smart will undertake a tender offer for minority shareholders of Piltel. The latter will become the holding company of the PLDT stake in Meralco.

Meralco has been run by the Lopez group for decades but it appears to be selling a strategic stake to PLDT to block San Miguel from gaining control, analysts said.

PLDT is ?clearly allying with the Lopezes,? said Jose Vistan, an analyst at AB Capital Securities Inc.

First Philippine Holdings, the holding company of the Lopez family?s power generation interests, said it would vote with PLDT at the May 26 annual meeting of Meralco stockholders.

It said it had agreed with PLDT on certain ?corporate governance principles,? such as the nomination of Meralco board directors that would enable PLDT ?to actively support in the management of Meralco?.

It did not say whether the Lopezes would relinquish management control of Meralco to PLDT, which now has the much bigger stake.

Part of entire puzzle

?Management positions will be determined during the stockholders? meeting. We are looking to have a productive and value-adding relationship with all the shareholders,? said First Philippine Holdings vice-president Benjamin Lopez.

Analysts said that while the Lopez group clearly benefited because ?they get the cash? that would ease their financial problems, the main players were now Pangilinan?s PLDT group and Cojuangco?s San Miguel.

?The bottom line here is that it?s down to just two parties. It will be a boxing match between the PLDT group and San Miguel Corp. for control of Meralco,? said Jose Mari Lacson, head of research at Campos, Lanuza & Co.

?The prize may not be Meralco but it?s probably part of the entire puzzle. Meralco becomes the leverage. The outcome is still not clear as far as San Miguel and PLDT are concerned,? he said.

Wealth Securities analyst Bernard Avinante said the outcome would depend on who has the edge after the Meralco shareholders? meeting in May.

Other analysts said the entry of PLDT would now make it more difficult for San Miguel to forge synergies between Meralco and Liberty Telecoms, another publicly listed company that San Miguel plans to take over.

San Miguel president Ramon Ang earlier said the broadband-over-power lines strategy ? providing Internet services using electricity lines ? would widen Internet access in the Philippines at a lower cost.

Another dealer said, ?San Miguel will be stuck with Liberty without getting any synergy with Meralco. Maybe they?ll just sell to Pangilinan too.?

PLDT-Meralco synergies

The PLDT group sees real synergy areas between Meralco and PLDT. According to ePLDT president and PLDT Beneficial Trust Fund vice chairman Ray Espinosa, the two companies can work together in eight specific areas: Power line broadband, fiber optic backbone network, electric power poles, easements and rights of way, prepaid electricity service, business offices, ICT or data center, bill statement printing and enveloping and subscriber base.

PLDT also wants the ?power line broadband? being eyed by San Miguel. This could be a means of providing wired broadband services in areas not currently reached by PLDT facilities or in areas where such facilities are already exhausted, providing substantial capital expenditure savings for PLDT, Espinosa said.

Meralco also has a subsidiary that operates a digital fiber optic network and provides data services to third parties, including current customers of PLDT, he added.

Meralco also has a large residential subscriber base which the PLDT Group can tap or cross-marketing and cross-selling initiatives, Espinosa said.

Read earlier story
Battle looms for Meralco

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