BIZ COLUMN:  ONE  STEP  BACKWARD,  TWO  STEPS  FORWARD

MANILA, MARCH 23, 2009
(STAR) DEMAND AND SUPPLY By Boo Chanco - Analysts are supposed to see beyond what seems obvious to less informed folks. I am disappointed that some of our best quoted stock market analysts failed to see beyond the sensational in the decision of the Lopez family to divest some of its shares in Meralco.

It is nothing more than a pragmatic strategy of one step backwards, two steps forward. Best of all, it didn’t really hurt that much in retrospect because the Lopezes are only going back to the 14 to 16 percent level of Meralco ownership that they had as recently as three years ago.

Astro del Castillo, managing director of investment fund First Grade Holdings said investors sold down Lopez listed issues because the Lopez ship seems to be in disarray. “Investors would rather look at other companies which are focused,” Del Castillo was quoted saying, “have a sense of direction and have an acknowledged captain of the ship.” In other words, he is saying the Group is leaderless. He totally bought the yarn about a serious family discord over the sale.

On the contrary, the decision shows the Group has a strong leader and despite some initial misgivings, family members eventually realize it is all for the best. It takes a strong leader to let go of a large portion of a company that had been identified for generations with the Lopez family.

Selling down Meralco was not done in haste. It had been an on again off again discussion for years within the group, specially when political pressure becomes unbearable. In one discussion I witnessed some years ago, the business case for divesting Meralco was made and this same patriarch, who is as emotionally attached to Meralco as his siblings, commented that he understood the business case but wondered if there is no more room for sentiment.

As part of the Group’s senior management, I had long advocatedThe Lopezes cannot ignore the strong hints constantly delivered by the administration that they did not want the Lopezes at the helm of Meralco. Of course the Lopezes could have chosen to fight. But is it worth it? Is a fight even winnable? Don Eugenio fought Marcos and it led to the darkest chapter of the family’s history. They cannot be blind to the lessons of history.

There is no denying the unusual interest of the First Family (the son sought the chairmanship of the House energy committee despite his lack of knowledge of the sector) and their cronies on the energy sector (TransCo, Petron, Meralco). That only means it would have been a hopeless fight that rational businessmen should avoid.

A highly publicized visit of Ate Glue to the San Miguel headquarters made sure the message was delivered and understood. It became clear the implementation of PBR is not going to happen nor will Meralco even be allowed to recover over P8 billion in under recoveries any time soon. These are advances Meralco had made more than two years ago in payment to power producers (mostly government owned Napocor) that Meralco had not been allowed to pass on to its customers.

Since the Lopezes borrowed a lot of money to buy Meralco shares in expectation of economic returns through the implementation of PBR as provided for by our laws, it no longer made business sense to be servicing that debt. In other words, politics screwed the business model and the time has come to bail out. Perhaps, now with PLDT and San Miguel having more at stake in Meralco, they may be able to muster more political persuasive powers to get the approved PBR finally implemented.

The proceeds of the sale to PLDT can be used to pay down debt and even allocate resources to other endeavors. New power plants and expansion of EDC’s geothermal activities top the list of potential new investments. The solar panel manufacturing venture, which will benefit from President Obama’s thrust in favor of solar energy, may also be able to justify additional investment.

The Lopezes have made a policy of investing only in the Philippines unlike other conglomerates like the Ayalas and the Chinoys. The only foreign investments of the Group had been made to serve the growing Filipino communities abroad through The Filipino Channel (TFC).

Now, there is talk of forging partnerships to build power plants abroad. EDC could step up efforts to explore for geothermal abroad, something it had started to do (Indonesia and Japan) during its early days in PNOC under Ronnie Velasco. Being freed from the sentimental fixation with Meralco may launch the Group into becoming a truly Global conglomerate at last.

My friend Joseph Roxas, president of stock brokerage Eagle Equities Inc., apparently failed to see beyond Meralco. He was quoted saying that “Meralco is important strategically... the power producers have to talk to Meralco to be able to sell. Meralco is the toll way. You can’t get to Manila without the toll way.”

No doubt, Meralco is strategic. But with open access and the fact that a serious shortage of power is looming in the next two years, the utilization of every power plant in the Luzon Grid is assured. Besides, the Lopez power plants utilize Malampaya natural gas where government collects a huge amount of royalties. It is to the interest of politicians in power to maximize utilization of those natural gas power plants.

In this sense, Del Castillo is wrong to say that “it would have been best if the Lopezes controlled both power generation and distribution enterprises.” That business model no longer works. Even Epira frowns on it. Who needs the political headache?

One step backward, two steps forward is a viable strategy in difficult times when dealing with irresistible foes. The painful decision had to be made because it was in the best interest not just of the Lopez family but of the shareholders of First Philippine Holdings. But potential foreign investors will look at this case and wonder… if a Philippine administration can screw a local investor that people say has extraordinary clout, what is the chance of a foreign investor getting a fair deal? Tie up with the ruling family, I guess.


Chief News Editor: Sol Jose Vanzi

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