Let’s break down the Manila Water deal between Ayala and Razon groups

Check out this piece I wrote on the first deal announcement: WHAT THE AYALA-RAZON DEAL ON MANILA WATER MEANS

I also wrote an explainer for Esquire after the succeeding announcements: HOW THE AYALAS SURRENDERED CONTROL IN MANILA WATER TO RAZON, AND WHY.

It’s a business deal being splashed with political color. And it’s unsettling, to say the least.

The recent deals on utility firm Manila Water happened just after President Rodrigo Duterte visciously and incessantly attacked the water business and its original owners: the Ayala family members who control the Philippines’ oldest conglomerate.

Duterte’s attacks started in early December 2019, and went on and on and on, causing investors and creditors to be jittery. Manila Water’s stock price plummeted—just like what happened to the share prices of all the other companies that suffered in the same line of Duterte’s fire. (Philweb, ABS-CBN, Philippine Airlines, DMCI, Metro Pacific, PLDT, Ayala Land.)

I personally never imagined the Ayalas giving up Manila Water. Though the years, their public narrative of how they envision their business group to be—providing basic needs for Filipinos—means Manila Water fits right in. Present and future.

Pray tell, how then can we make sense of the major announcements that came out end-January and first week of February 2020?

We’re not talking of mere tweaks in marketing or logistics tactics. We’re talking major overhaul at the top.

What I know is this: even when Manila Water had challenges in 2018 and 2019, it was facing these head on. Recall that Manila Water was quietly balancing its relationship with its regulator (on water sourcing and other issues), the government (because of an ongoing arbitration case), and its irked clients in the east zone of Metro Manila whose taps were dry.

Amid these risks, the Ayalas and their executives were right there in middle of, or behind, or somewhere in the battlefield.

They folded only when Duterte himself pushed their buttons.

So far, what we know about the deals are these:

The Ayala group (through its holding firm and others) will still be the single biggest shareholder—in terms of (1) OWNERSHIP and (2) SHARE OF THE PROFITS. The former is technically referred to as “ownership stake”, and the latter is “economic interest.”

The Razon group, however, will have majority control (51%). Technically that stems from the VOTING RIGHTS. Note: What Razon will have is a “right” which was granted to him via proxy by Ayala Corporation, which retains ownership of the Manila Water shares.

Because of the shareholdings structure of Manila Water, the changes after these deals mean:

The Ayala group will still be entitled the biggest share of the earnings of Manila Water. (Note: Technically, yes, the Ayala group is still the “biggest”, but the entry of Razon reduced their share of the earnings—both from their common and preferred shares—from somewhere in the vicinity of 50 to 60% to only 38.6%)

Razon, on the other hand, will have lesser share of the earnings from his 25% ownership stake, plus the equivalent economic interest of the preferred shares. However, Razon will be calling the shots.

He won’t be a bystander or a minority voice in the Manila Water boardroom where owners make decisions on things that have short-, mid-, long-term impact. Razon’s 51% voting rights mean he will steer the Manila Water ship moving forward.

Razon’s moves align perfectly with his reputation as a businessman. He likes to be the one in control, to be hands-on. He’s not the passive type. He sold his stake in NGCP when he was squabbling with another shareholder over control of the power transmission firm. He brought the fight to control electricity distribution services in Iloilo all the way to the Supreme Court.

But what are these deals for for the Ayala group? Is it just about the money—having access to the P10 billion fresh funds Razon will be putting in? Holding on to Manila Water in their diversified business portfolio and keeping the flow of water profits coming?

At the end of the day, this was a business decision made by mature and consenting adults, after all.

I guess this saga will keep unfolding. Clarity and sense will come.

Zooming out and making sense of the bigger picture, I wonder what narrative in the Philippines’ political economy was just sealed. Did this Manila Water story just confirm how private firms and the business elite should deal with a political leader like Duterte?

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