State of M&A stock plays
If the recent financial deal on Atlas Consolidated Mining and Development Corp. (AT) raised the bar of business transactions involving mergers and acquisitions (M&A) in the local market, the latest developments involving listed moribund company East Asia Power Resources Corp. (PWR) is simply mind-boggling.
The market play that followed after the M&A activity in PWR is leading the market to a frenetic heightened level of speculative stock play.
PWR is a Philippines-based holding company listed under the “electricity, energy, power & water” category of the industrial sector of the bourse.
Incorporated in 1975 as Northwest Holdings and Resources Corp. until it changed name in 1996, PWR through its wholly owned subsidiaries, East Asia Diesel Power Corp. (EADPC) and Duracon Mobile Power Corp. (DMPC), (a 40-percent owned subsidiary of EADPC) owns four bunker diesel-fueled power barges in Navotas, Metro Manila, with an aggregate capacity of 242 megawatts and supplied about 3 percent of the electricity requirements of Manila Electric Co. (MER). It had stopped operation because it could not earn beyond its costs.
On July 11, 2011, PWR formally became a subsidiary of Century Properties Inc. (CPI), a renowned real-estate company.
On May 30, 2011, PWR shares were just trading at their usual price range for the last two years. Suddenly, trading on PWR shares burst to life the following day. It hit the high of P0.39 a share, then to another high of P0.95 on June 15, and then consolidated until the week ending last July 8.
On July 11, PWR shares simply took off like a space shuttle that was taking off for the sky.
As of the close of trading last Friday, July 15, PWR shares recorded the closing price of P2.62 apiece. It hit a session’s high of P2.75 (which was a 52-week high record) on a value turnover of P196.11 million involving 80,345,000 shares.
This closing price was 34.36 percent higher than the previous day’s closing price of P1.95 a share.
Compared with its 52-week low of P0.20, PWR shares had already zoomed as much as 1,375 percent based on its 52-week high of P2.75 a share.
All this started when CPI and El Paso Philippines Energy Co. Inc. (EPPECI) entered into a negotiated purchase through a deed of assignment of shares of stocks last May 31. This covered the acquisition of 284,250,000 common and preferred shares (called the “Private Sale Shares”) and the further acquisition of 67,090,092 common shares (called the “Public Sale Shares”). This resulted into an indirect control of 91.695 percent and 1.888 percent direct control, respectively, on the total issued and outstanding capital stock of PWR.
The purchase price for all of the said shares amounted to P127.41 million broken down into P2.57 million for the “Public Sale Shares” and P124.84 million for the “Private Sale Shares.”
CPI also made the necessary mandatory tender offer to other minority shareholders whose aggregate shareholdings were equivalent to 288,109,953 shares, or 6.417 percent of the total issued and outstanding capital stock of the company.
The tender offer was P0.04 a share, some P0.02 higher than the purchase price for the 93.583-percent stake acquired through EPPECI. This would additionally cost CPI some P9.12 million.
Expectedly, the tender offer did not prosper as other minority stockholders turned to the trading board to sell their shareholdings.
In its report to the SEC and PSE, PWR reported that “per results of the tender offer, no stockholder tendered his share. Hence, Century Properties Inc. directly and indirectly acquired 93.583 percent of East Asia Power Resources Corp. (PWR).”
What is so promising about this deal on PWR? What stockholders’ value will be unraveled with the entry of CPI?
Off hand, the approximately P3.555-billion capital contribution of PWR shareholders as of the end of Dec. 31, 2010, had been completely lost. Not just that, they face debts to third parties amounting to no less than P2 a share.
CPI has yet to disclose its plans on whether the power assets would be reopened or new businesses will be infused into PWR.
CPI is led by Jose Antonio, a former stockbroker and special envoy to China. His 25-year-old company has undertaken 40 major projects and is now one of the largest privately owned full-service real-estate outfits in the Philippines, with more than $2 billion in assets under management, as reported.
There is speculation that CPI may bring back PWR to the power-generation business. Some say that this takeover may lead to some other business ventures beside power generation, with either of both business alternatives producing unparalleled profits that may support a new market price of PWR between P3 and P5 a share.
Such musings, while precipitated by the main idea behind M&A initiatives (where when two companies are put together is more valuable than as two separate companies), how CPI will put the balance sheet of PWR on a clean slate and place its new project initiatives unimpaired unlike what is happening to the investments of people who are now buying PWR shares, would be a key factor in the advance of PWR’s future stock price.
Considering the track record of CPI’s management, I could almost see that CPI may have somehow found a way to get rid of the obvious problem of taking a hit on the huge capital deficiency and outstanding liabilities of PWR.
But until then when the strategic measures are given more clarity, the stock play on PWR and to other stocks growing out of the M&A activities in the market today may be described as “irrational” at the moment.
(You may reach the Market Rider at [email protected] or directly at www.kapitaltek.com.)