NOTE: This was a story I wrote a year as part of my coverage of the Lopez family’s battle against a hostile Arroyo government in 2008. The family business was under attack due to the conglomerate’s media arm ABS-CBN’s news coverage that was critical of the then Arroyo government. This story is a post-mortem of the entry of San Miguel Corporation into Meralco. San Miguel had acquired the shares of state pension fund GSIS in Meralco after the tumultuous annual stockholders meeting, which starts the Lopezes’ war for control of their ‘crown jewel.’ Not long after, the Lopezes will give up Meralco for their other battles. 
This was published on October 29, 2008 on the news sites of ABS-CBN and Newsbreak, but the links are both dead now. There have been many changes and challenges within the Lopez family itself, as well as in the boardrooms of the companies they run. I hope that sharing this piece of history provides context to the never-ending evolution of the Lopez family.

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The October 27 announcement of Government Service Insurance System’s (GSIS) sale of its stake in the country’s biggest power retailer company abruptly ended the public war between bitter foes, GSIS’s Winston Garcia and the Lopez family.

Garcia, the government-run pension fund’s chief, and the elite Lopez family, each representing aggregate one-third ownership of Manila Electric Co. (Meralco), were in an 8 month-long battle in various fronts. What started as a boardroom row in March has evolved into a full-blown corporate battle with the two wrestling for board control in May. When their issues were raised to the legal front, appellate court judges ended up disgraced in August for their undue interest and unethical handling of the Meralco case. 

During those months, Meralco goings on have become one of 2008’s most-watched drama, where spectators had a ringside view of how politics, business, and the judiciary interacted in the unfolding saga. 

Enter San Miguel Corporation. The country’s biggest food conglomerate’s purchase of GSIS’s 27 percent stake in Meralco is expected to shove these eventful 8 months to just another chapter in Meralco’s colored history. 

But while it is easy to eventually shrug off Meralco-GSIS spectacle just another case study of how business is done in the Philippines, some pending questions and lessons learned should be instructive. 

Not a surprise

Let’s start with San Miguel, the seemingly odd but potentially strategic buyer. 

San Miguel’s entry into Meralco is actually not a surprise. During the run-up to the contentious May 27 stockholders meeting, when both the GSIS and Lopez camps were strategizing how to outdo each other in gathering the most proxy votes from minority shareholders, sources intimately familiar with the goings on told abs-cbnnews.com/Newsbreak that one of the options the Lopezes were mulling was to partner with either San Miguel or a group of foreign investors to buy GSIS out. 

The cast of characters in the three companies—GSIS, Meralco and San Miguel—were in sort of a merry-go-round. GSIS previously had a stake in San Miguel. GSIS sold this stake and used some of the proceeds to increase its holdings in Meralco. Then San Miguel’s executives were supposed to capitalize on their previous relationship with GSIS’s Garcia to make the latter agree to be bought out—another illustration that the country’s elite businessmen belong to a small circle.

But those plans, which some go-betweens and Lopez sympathisers were trying to arrange, eventually fizzled out.

Nonetheless, San Miguel’s delayed entry into Meralco proved to be a wise move. The appalling revelations on how various conflicted interests tried to influence the Court of Appeals judges handling the Meralco case, and the September eruption of the brewing US credit crisis that infected economies all over the world, battered global capital markets. Meralco’s share price, which was worth about P60 in April, plummeted to P44.50 recently. 

Transaction price

While San Miguel could claim that it is buying the Meralco stake at a cheaper price, those scrutinizing the transaction at its current face value perceive San Miguel’s timing and purchase price as odd. 

San Miguel’s disclosure that its board directors have authorized management to enter into an agreement to buy GSIS’s holdings in Meralco came on the very same day that the local stock exchange recorded a 12.4 percent fall, one of its deepest one-day plunge in its 80-year history. 

Meralco’s shares closed lower at P44.50, pulling the worth of GSIS’s shares to about P13.40 billion. 

But San Miguel is buying GSIS’s shares for P90 pesos a share, pushing its total bill to about P26 billion. 

That’s a price San Miguel must need to explain to its own shareholders since analysts say it’s “expensive.”

Even if the P26 billion is payable in three years and is interest-free, effectively reducing the buying price per share to somewhere in the vicinity of P80, “that price is still equivalent to roughly 25 times in price-earnings ratio,” a utility analyst told abs-cbnnews.com/Newsbreak, referring to a method of valuing a listed company based on its profits. 

That Meralco is being bought at 25 times its profits indicates a buying price way higher than that of other listed power companies, such as Aboitiz Power Corp and PNOC-EDC, which are currently trading at just 7 times and less than 6 times, respectively. 

Waiting for the rate increase

However, the analyst said the P80 or P90 price per Meralco share would be “reasonable” if the Energy Regulatory Commission (ERC) eventually implements a long-delayed tariff increase for Meralco’s distribution charge. 

Meralco has an ERC-approved tariff rate increase, which on the average is about P0.145 per customer. Meralco’s 4.4 million customers will feel this on their electricity cost, which average nearly P9 per kilowatt hour, as a mere 2 percent add-on. 

Highly regulated utility companies, like Meralco, are supposed to be a simple business with stable cash flows from customers who have no other choice but to source their power supply from the franchise holder. But to improve its finances, Meralco is also dependent on tariff increases. The last Meralco was able to increase rates was in 2003.

The P0.145 rate increase will add as much as P2.6 billion a year, net of tax, to Meralco’s bottomline, which as of end-2007 was at about P3.7 billion. Thus, if implemented, the tariff increase will help justify San Miguel’s purchase price, which will be equivalent to a price-earnings ratio of just 11 times. 

Incidentally, ERC again stalled the execution of the rate increase on the same day of San Miguel’s purchase announcement.

About a week before, various interest groups criticized ERC’s go-signal of the rate increase, citing populist reasons. Rate setting is a highly political issue since it impacts on the poor who comprise about a third of the country’s 90 million population.

GSIS: Flipper and winner

Championing the interests of the poor was Garcia’s main battlecry during his spats with the Lopezes in the Meralco board. 

What started as Garcia’s minor accounting inquiry into Meralco’s pricing policies and personality differences with Meralco chair Manolo Lopez, have since morphed into a full-blown political controversy, as critics and politicians level various price-fixing allegations against the company. Pro-administration lawmakers even launched a joint investigation into Meralco’s operations and echoed Garcia’s cause of lowering the company’s rates. 

Garcia also called for a change of management, citing that inefficiencies add on to the burden of the poor. 

But the Lopezes and their sympathizers were resigned to Garcia’s style. A shareholder from Meralco, who requested not to be identified, described Garcia as being on a ‘witch-hunting’ mission, thus, whatever explanation they gave did not satisfy him. 

From the start, the Lopezes viewed Garcia as just out to earn a quick buck from GSIS’s investment in Meralco and was just using the populist stance as a ploy to picture the Lopezes as the big, bad capitalists. 

In various occasions, Meralco executives tried to deflect the criticisms by citing the incongruence of Garcia’s points. They said it did not make sense for Garcia to call for lower rates or stall tariff increases when these would affect how much Meralco will profit, which determines how large or small the dividend amounts will be paid out to shareholders, like GSIS. 

Nonetheless, flipping an investment after holding on to it for a couple of months is not new for Garcia. In the case of Equitable PCI Bank, there were also tiffs with the Sy family who would like to solidify their ownership of their newly acquired bank, but Garcia blocked them. In the end, the Sys agreed to buy GSIS’s block in Equitable PCI Bank, now called Banco de Oro, at P92 a piece, more than twice the original purchase offer of the Sys. 

Rush sale

In the case of its Meralco shares, it seemed that GSIS rushed the sale. 

Garcia has been consistent in saying that “My obligation is to get fair returns for our investment” and “We are using the funds of the [GSIS] members, so we are investing to make money.” 

But unlike in the Equitable PCI Bank share sale where GSIS earned a windfall, GSIS could have potentially fetched more than the P12 billion it netted from its Meralco share sale to San Miguel.

For one, the global capital markets were at their lowest at the time of the transaction. 

For another, it sold some of the Meralco shares almost at cost.

Of the approximately 301 million Meralco shares that it sold to San Miguel, about 110 million shares were bought just in January 2008. At that time, GSIS bought the additional shares from the national government for about P80.91 per share—almost equal to or just under its about P80 to P90 selling price less than a year after to San Miguel.  

In January, it shelled out P8.9 billion for shares that now account for about one-third of its 301 million shares. 

Cash-rich partner

Moving forward, the changing of hands between GSIS and San Miguel is a welcome development to the Lopezes and their allies. 

It is also expected that the court case between GSIS and Meralco, now elevated to the Supreme Court, will be moot. 

Something to watch out for is whether San Miguel will also buy the 9.32 percent Meralco stake of the other government entities, namely Philhealth, Land Bank, SSS, and Pag-Ibig. GSIS lumped its 27 percent with that of the other government entities to have a voting block that would rival the Lopezes’ 33.4 percent. 

However, if San Miguel consolidates all the government’s interest under its wing, then it will need to make a tender offer, also at P90 per share, to all the other shareholders. 

San Miguel could afford a tender offer, but is unlikely to put all its eggs in Meralco. 

San Miguel has a huge war chest: some P100 billion in cash and short term investments as of end-June. San Miguel is cash rich after raising some $4 billion from selling profitable assets, including its brewery business, a well-established market leader but has unexciting and flat growth prospects. 

For the past years, its top executives have vowed to reinvest the sale proceeds in mining, property, and energy—industries that have higher and faster growth prospects. The purchase of the Meralco stake is its first foray in the energy business. 

San Miguel’s purse power should also give confidence to Meralco investors especially after the power retailer lost court battles, which resulted in billion-pesos worth of customer refunds. 

San Miguel is perceived as a strategic partner to the Lopezes because of the former’s experience in turning things around.