JG Summit pays P72B for Meralco

Gokongwei-led JG Summit Holdings Inc. has agreed to pay P72 billion for the 27-percent block held by conglomerate San Miguel Corp. in Manila Electric Co., the country’s largest power distribution firm.

In a disclosure to the Philippine Stock Exchange on Tuesday, JG Summit disclosed the price tag for the block, which was valued at $1.65 billion based on current peso-dollar exchange rate.

The P72-billion price tag for the 27-percent stake in Meralco implies a price per share of around P236, estimated Jose Mari Lacson, head of research at local stock brokerage Campos, Lanuza & Co., in line with his firm’s expectations.

Combined with SMC’s earlier sale of P270-per share for an initial 5.7 percent stake, the conglomerate has fully divested from Meralco at a weighed average price of P240.42  per share, Lacson estimated.

“JG Summit intends to finance the acquisition with a combination of debt and equity capital,” the Gokongwei firm said. The disclosure added that the transaction was “still subject to the completion of certain mutually agreed conditions to closing.”

In a research note from Private Clients Group (PCG) of COL Financial through publication “Room With a View,”  JGS was seen to follow the route taken by Beacon Electric of the Manuel V. Pangilinan group, for its purchase of Meralco shares.

Beacon, a partnership between PLDT group and Metro Pacific Investments, is Meralco’s single largest and controlling shareholder, owning about 49.96 percent.

PCG noted that the funds used by Beacon to purchase the Meralco shares were from a combination of equity and debt, structured in such a way that annual dividends from the power distribution firm would be sufficient to pay for the bulk of the interest and amortization of the loans used to buy Meralco.

What distinguishes JG Summit from other family-owned conglomerates in the country, PCG noted, was its history of willingness to participate passively in other people’s businesses for a variety of reasons. PCG cited JG Summit’s passive stakes in San Miguel (in the 80’s), Philex Mining Corp. (in the 90’s), Anscor (in the 90’s) and its existing stake in Singaporean property firm UIC.

“We think this sets it apart from other groups as it shows the group’s maturity in its ability to look at companies objectively, taking advantage of an opportunity when it presents itself; whether for purely economic reasons, as a learning experience, or a future takeover target,” the research noted.

PCG said JG Summit had the capability to fork out the equity needed to pay for 40 percent of the cost of Meralco purchase and assumed that the remaining 60 percent would be funded by borrowings.

“In 10 years, the estimated dividends from Meralco would be sufficient to pay off the loan, including interest. Therefore, assuming Meralco share price will be at P600 per share by 2023 and JGS decides to sell it all by then, they would have made an annual return of at least 15 percent from their original investment. We would like to think this might beat the return from a Jollibee franchise over the same period,” said the research note.

PCG said SMC was likewise a “winner” in this transaction as proceeds should give the conglomerate some space to rebalance its portfolio.

Apart from removing the overhang on Meralco shares, the SMC-JG Summit deal is also seen to benefit Pangilinan’s group, PCG said, adding that JG Summit would be a “more desirable” partner in Meralco than fierce rival SMC.

“While JGS and (Pangilinan-led) PLDT Group will benefit individually, we can not stress however the importance of recognizing the possible emergence of a new corporate superpower in the future as a result of this cooperation. This is a clear case where 1+1 will equal more than 2. The cooperative financial and economic clout of a JGS-PLDT combine would be enormous – in scope, scale, and firepower,” PCG said.

The research note said this can allow the cooperators to access bigger and better opportunities here and abroad.