A GROUP LED BY BUSINESSMAN Eusebio Tanco has committed to sell to the Lopez clan its remaining 3.12-percent stake in geothermal power crown jewel Energy Development Corp. at a premium to the current P2.92 billion block value.
In a disclosure to the Philippine Stock Exchange Wednesday, the Lopezes? First Gen Corp. announced it had executed a call option agreement to buy over a three-year period the remaining 585 million EDC shares held by the Tanco group through Philplans First Inc., Rescom Developers Inc., Philheathcare Inc. and Systems Technology Institute.
This deal gave First Gen the right but not the obligation to buy the group?s remaining stake in EDC at escalating prices up to April 2013. First Gen was entitled to buy additional shares from the Tanco group at an exercise price of P5.67 per share for the first year, P6.19 for the second year and P6.76 per share for the third year, the disclosure said.
Shares of EDC, picked as a stock market favorite by a number of stock brokerage houses this year, closed 4.2 percent higher at P5 per share at the stock market yesterday.
"This is simply value investing by locking in a number of EDC shares at predetermined prices in the future,? said First Gen chief finance officer Francis Giles Puno.
?It reflects confidence in the value of EDC as a worthwhile investment. It also compares very favorably with our original purchase price of P7.80 per share when we won the bid for EDC,? Puno added.
With the proceeds from the sale of a substantial stake in power retailer Manila Electric Co., the Lopez group is spending some of its cash to raise its stake in EDC. The family now controls 28 percent of the voting rights in EDC through Red Vulcan Holdings Corp., which owns 60 percent of EDC. The Lopezes own 45 percent of Red Vulcan.
The strike price of the call option is within the perceived fair valuation of EDC. Online stock brokerage CitisecOnline, in a recent commentary, raised its fair value estimate on EDC stocks from P6.70 to P6.80 per share as it upgraded the revenue forecast for the company?s Tongonan and Palinpinon power plants and lowered its assumption on debt level.
The additional stake committed for sale by the STI-Tanco group accounted for 65 percent of the block purchased in February from the state-owned Government Service Insurance System. An initial 35 percent of this stake had already been sold to the Lopezes for P5.35 per share via a P1.69 billion block sale at the stock exchange last April 7.
The STI-Lopez group, for its part, stands to lock in gains from the Lopezes? prospective exercise of the call option on the remaining EDC stake. The entire stake was bought from the GSIS at P5.10 per share.
EDC operates 12 geothermal steamfields in five geothermal service contract areas where it is principally involved in the production of geothermal steam for sale to the National Power Corp. The company is also involved in the production of steam for delivery to build-operate-transfer power plants that convert steam to electricity for sale by EDC to NPC. For its third business segment, the company provides drilling equipment and rig personnel to the Lihir Gold Limited. Lastly, with its acquisition of a 60-percent equity stake in First Gen Hydro Power Corp. in 2008, EDC also entered the operation of hydro power plants.
According to CitisecOnline, two potential catalysts for this year provide an upside to EDC?s share price: ?the hedging of $240 million worth of Miyazawa yen loan which will mature this year; and
?the possibility of the company winning the bidding for the 150-megawatt Bacon-Manito (Bacman) geothermal plant in May.
CitisecOnline said EDC could also post higher profit this year as it no longer needs to book capital spending as immediate expenses under the accounting rules for concession arrangements. Given that EDC?s geothermal steam fields and plants are no longer considered public sector infrastructure assets, it will be able to stagger capitalization on projects.