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Stock Commentary

DITO "postpones" SRO for lack of interest

Merkado Barkada
DITO "postpones" SRO for lack of interest
Nothing to see here, just minority investors getting jerked around as DITO tries to figure it out in real-time.
Merkado Barkada

The stock rights offering (SRO), which Dennis Uy’s DITO CME [DITO 5.08 1.17%] had initiated to fund its attempt to comply with the roll-out conditions of its telco franchise, has been deferred (not canceled) just two days before the SRO shares were scheduled to list on the PSE. DITO said the deferral comes as a result of “less than ideal market conditions and other perceived risks”, and that the company would refund all shareholders and institutional buyers that purchased shares during the SRO offer period.

Wait, isn’t the market doing OK? Yep. The market has been trading over the 7,000-level for the last 3.5 months, which is both the highest that it’s been since the March 2020 COVID crash, and the longest that it’s remained above the 7k level since that time. Looking at overall market performance as an indicator of sentiment, it’s hard to see what DITO’s talking about. In fact, the market closed at 7,197 on December 13, 2021, the day DITO disclosed the SRO. This deferment announcement comes with the market sitting at 7,251. 

Lack of demand? The SRO’s underwriter, Chinabank [CHIB 25.45 0.59%], said that there was “good support from existing shareholders” for the SRO, but most analyst statements over the weekend attribute the SRO’s failure to a “lack of confidence” in DITO. Even if minority shareholder demand wasn’t strong, though, Udenna Corp (DITO’s parent company) had the option to purchase any unavailed shares, and CHIB, the offering’s underwriter, had a written commitment in the SRO’s final prospectus to purchase any unavailed SRO shares after the SRO’s mandatory second round. Regardless of what minority shareholders did, Udenna had the right, and CHIB had the obligation, to buy up whatever was leftover. DITO, Udenna, and CHIB were essentially communicating that the SRO was “fully bought” before it even officially went on sale.

Poor institutional demand: DITO’s President, Ernesto Alberto, said that retail demand was good but that “institutions” (from government agencies, mutual funds, and whales) “chose to stay on sidelines due to the bearish market environment”. Is it accurate to put CHIB, the issuance’s underwriter, into this category?

Can DITO do this? In the “Acceptance/Rejection of Applications” section of the prospectus, DITO says that it “reserves the right to withdraw the offer and sale of the shares at any time”. It’s possible to quickly get into the weeds in arguments over whether it’s possible to revoke an offer to sell after the buyer both accepted the offer and remitted payment for the offer which was received by the seller. The terms of the deal say that payment doesn’t equal “acceptance”, so in that regard, perhaps it’s best to think of this like an over-subscribed IPO where refunds are issued on unfulfilled subscription requests. 

What’s the PSE going to do? The PSE issued a disclosure saying that DITO’s announcement should not be construed as PSE approval for the deferral, that the PSE reserved the right to administer “REGULATORY ACTION” to “FULL COMPLIANCE WITH THE APPLICABLE RULES AND FOR THE PROTECTION OF THE INVESTING PUBLIC”. The PSE ended its statement with an ominous: “THE EXCHANGE DISCLAIMS ANY LIABILITY ARISING FROM, OR IN CONNECTION WITH, THE FOREGOING MATTER”. Yes, the exchange wrote all of that (and more) in all-caps. 

What’s DITO going to do? A confusing mix of “studying several alternative financing proposals”, and also dropping hints that it might just use the “US$4 billion in long-term debt” that DITO has “secured” from Chinese lenders to fund the rest of its roll-out plan. Is using this Chinese debt the “alternative financing” that DITO is exploring? Don’t know. Does DITO have access to the Chinese loans already? Don’t know. They say they’re still negotiating the “binding agreements” on the loans, which makes it sound like they’re still scrambling to lock it down.

What about the minority shareholders? Yeah, what about us retail chumps? I guess it’s pretty easy to forget that DITO’s stock did over 13 million in trading volume on the day before the SRO’s ex-date, which is around four times the stock’s average trading volume in the days leading up to the announcement. The stock price reached P6.11/share during that day’s trading session, a 4% bump from the previous day’s close, on the demand from retail investors hoping to take advantage of the “attractive discount” offered by DITO for the SRO shares. COL Financial [COL 4.04 1.22%], even sent an email at the time of the SRO offer period extension notice, advising clients to potentially sell their underlying DITO shares to pay for DITO SRO shares as a creative method of financing the purchase. Sure, investors that followed COL’s advice would have been “saved” from the 10.4% stock price meltdown that DITO has suffered since that January 14 extension announcement, but that’s just a coincidence. What if it went the other way? What if COL had given that advice, the stock rose 10%, and the SRO failed? I don’t think there are liability issues in this instance, but this case definitely exposes a gap that the PSE needs to fill to prevent a potential future liability event that could have much uglier consequences.

MB BOTTOM-LINE

Nothing to see here, just minority investors getting jerked around as DITO tries to figure it out in real-time.

Seems like a massive lack of confidence in DITO if Dennis Uy would rather “postpone” the DITO SRO than buy into the SRO himself through Udenna, and CHIB would rather walk away from its prospectus commitment entirely.

How long will it take SRO investors to receive their refunds?

Will DITO reschedule the SRO or will this be something that ends up canceled indefinitely?

Will the PSE push back against DITO for the protection of the investing public, and if so, what will it do?

Will DITO receive the funding from the yet-to-be-finalized Chinese loans?

Does the deferment of the SRO raise the risk that DITO may not meet the technical requirements of its mid-year audit?

For a company that wants so badly to be considered as a fully-formed peer alongside its entrenched rivals, Globe [GLO 3240.00 0.61%] and SMART [TEL 1849.00 0.05%], DITO sure doesn’t act like it.

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Merkado Barkada is a free daily newsletter on the PSE, investing and business in the Philippines. You can subscribe to the newsletter or follow on Twitter to receive the full daily updates.
Merkado Barkada's opinions are provided for informational purposes only, and should not be considered a recommendation to buy or sell any particular stock. These daily articles are not updated with new information, so each investor must do his or her own due diligence before trading, as the facts and figures in each particular article may have changed.

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Merkado Barkada is a free daily newsletter on the PSE, investing and business in the Philippines. You can subscribe to the newsletter or follow on Twitter to receive the full daily updates.
Merkado Barkada's opinions are provided for informational purposes only, and should not be considered a recommendation to buy or sell any particular stock. These daily articles are not updated with new information, so each investor must do his or her own due diligence before trading, as the facts and figures in each particular article may have changed.

DITO TELECOMMUNITY CORP

PHILIPPINE STOCK EXCHANGE

UDENNA CORP.

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