A much-awaited union of capital market entities

It has been a long and winding road for the Philippine Stock Exchange (PSE) in its bid to acquire PDS Holdings Corp., in turn part of the aspiration to unify the country’s capital market infrastructure. Now on its 25th year since the unification of the old Makati and Manila stock exchanges to create the bourse that we now know as the PSE, will it be successful in merging with the PDS Group this time around?

Recently, the PSE obtained commitment from other key shareholders of PDS to sell their shares, which will allow the former to gain majority control of PDS, the holding firm for fixed-income trading platform Philippine Dealing and Exchange Corp. (PDEx), Philippine Depositary and Trust Corp. (PDTC) and Philippine Securities Settlement Corp. (PSSC).

The Bankers Association of the Philippines and affiliate firms, the single biggest stockholder group, earlier agreed to sell their 23.8-percent interest in PDS. More recently, the PSE also obtained a commitment from IT provider Whistler Technologies Services Inc. to sell its 8-percent stake. As the PSE already owns 20.98 percent of PDS, the shares committed by these two shareholder groups will allow it to raise its interest in PDS to 52.78 percent.

“This transaction is envisioned to facilitate further growth in the local capital markets by introducing efficiencies in the trading and back office systems of both the equities and fixed income markets, among others,” the PSE said in a regulatory filing.
“It is aimed at creating a better environment for the introduction of more products and services for the various market stakeholders as well as the implementation of improvements in risk management processes,” it added.

Another significant PDS shareholder that the PSE still has to convince to sell is Singapore Exchange Ltd., which owns around 20 percent. Other shareholders are San Miguel Corp. (4 percent), Tata Consultancy Services (8 percent), Financial Executives Institute (3.1 percent) and Development Bank of the Philippines (3.1 percent).

P2-billion valuation

This time around, the PSE is buying out shareholders at P320 a share or a total price of P2 billion for 100 percent of PDS Group. This is a bit lower than the P2.25-billion valuation when it last attempted to take over PDS in 2015-2016.

The reduction in the valuation reflects the exclusion of the government securities (GS) business under PDEx, a segment that’s otherwise “problematic” because of a pending legal case at the Supreme Court.

To recall, the group of former congressman Luis Villafuerte filed a case against PDEx and financial regulators, complaining what was described as a monopoly in GS trading. This time around, Villafuerte has agreed in principle to drop the case for as long as the over-the-counter (OTC) trading of GS will be taken out of PDEx.

Without the GS business, which accounts for only 30 percent of PDS’ business, what the PSE would like to focus on is to develop a real working exchange for corporate bonds within PDEx.

The depository business under PDTC is also a big incentive for the PSE to proceed with this acquisition as this accounts for 70 to 80 percent of the PDS’ net income. In a scenario where the PSE will be unable to take over PDS, it’s ready to set up its own depository system.

Regulatory hurdle

Apart from convincing other shareholder blocks to sell their shares, the PSE also needs to convince the Securities and Exchange Commission (SEC) to exempt the stockbrokerage industry from the 20-percent ownership limit that any single industry can own in an exchange.

The last time that the PSE requested such exemption, SEC officials rejected it, arguing that the PSE had not been able to demonstrate any meaningful benefit to the investing public and capital markets under a monopoly or any concrete plan to improve trade surveillance and transparency, clearing and settlement stability, business risk mitigation as well as governance and management competence.

Any exemption is warranted only if it will “not negatively impact PSE’s ability to operate for the public interest,” SEC Chair Teresita Herbosa said last year when the request for exemption was rejected.

The SEC had also raised questions on how the shareholder structure would shape up. Instead of having a merger of equals—the route preferred by the national government and one which would no longer have required the exemptive relief in the first place the SEC is not keen on the PSE buying out all other shareholders to gain 100-percent control of the unified entity.

On the claim that the best practice would be to consolidate the equity and fixed income markets, the SEC said that while a consolidation might produce benefits, regulators were not convinced that this acquisition of PDS would produce any benefit to the investing public, issuing companies or capital market development in general.

“PSE’s proposal failed to provide clear and time-bound commitments to demonstrate that the consolidation will translate to meaningful benefits for various stakeholders,” the SEC said in its position paper.

For its part, the PSE is now working on a formula to dilute stockbrokers’ cumulative ownership of the bourse to 20 percent to demonstrate to the SEC that it has concrete plans to comply with the cap prescribed by the securities law.

Among the options on the table include issuing shares to new investors via a private placement or offering voting preferred shares. But one measure that can be easily executed, subject to approval of the SEC, will be to exclude shares of dormant stockbrokers from the pool of shares counted as held by stockbrokers. At present, stockbrokers or trading participants collectively own around 27.9 percent of PSE’s stocks.

“We’re exploring several options. On the surface, the easiest is to convince some brokers to sell their shares to nonbrokers. Failing that, we have to go to the next step, probably there could be a private placement of shares or we could offer preferred voting shares,” Monzon told reporters.

There are about 12 to 15 non-operating stockbrokerage houses that still own shares collectively equivalent to 3.4 percent of total stock. If these shares were taken out of the pool counted under the brokerage industry, that makes the job a bit easier for the PSE.

The PSE is also discussing with the SEC the possible relaxation of rules against the trading of PSE shares by stockbrokers. Since stockbrokers are in excess of the 20-percent single-industry limit at this time, they are not allowed to buy or sell PSE shares for their own account. They can only trade PSE shares on behalf of clients. As such, PSE shares at present are deemed to be artificially determined.

Aside from the exemptive relief, the PSE’s takeover of PDS will also have to be scrutinized by the Philippine Competition Commission, a newly created independent body mandated to review all merger-and-acquisition deals amounting to P1 billion or above to promote and protect market competition. It will also have to be screened by the Bangko Sentral ng Pilipinas in relation to the ownership of PDS.

If the long-awaited merger with PDS finally happens this year, it will be a great way to top off the PSE’s silver anniversary celebration.