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Stock Commentary

DITO stock halted as PSE demands explanation for canceled/delayed SRO

Merkado Barkada
DITO stock halted as PSE demands explanation for canceled/delayed SRO
The “market” wasn’t weak. The capital markets are fine. This activity suggests that there’s nothing wrong with “the market” or its interest in compelling financial opportunities.
Merkado Barkada

In a significant escalation in the spat between the PSE and Dennis Uy’s DITO [DITO 5.08 halt], the PSE halted trading of DITO’s stock and required the company to provide an explanation (“comprehensive disclosure”), with a focus on the timeline and procedure for refunds, in light of the “materiality” of the SRO deferment to the stock and its investors. The PSE continued its counter-attack in the media, with Ramon Monzon, the PSE’s President, telling the Inquirer’s Miguel Camus, “If this is allowed to happen again it’s going to make a mockery of this firm underwriting concept”. Mr. Monzon highlighted the actual losses (not just theoretical losses) that some traders may have suffered in selling DITO shares after the price was automatically adjusted on December 20th after the ex-date.

DITO’s response: DITO said that the deferment was made after “a long thought-out process with extensive discussions” between DITO, Udenna Corp (DITO majority shareholder), and Chinabank [CHIB 25.45], the underwriter of the stock rights offering (SRO). DITO said that deferment was in the “best interest of the company”, but “especially” its minority shareholders. DITO said that “the Philippine financial markets opened on a negative note in 2022”, and that the “less than ideal market conditions” triggered DITO’s “obligation to ensure that the investment of all its shareholders, including the minority shareholders, are sufficiently protected.”

Did the market open on a negative note? No. While the December 31 close was 7,122, and the exchange drifted slightly lower in the first few days of trading (down to a low of 7,011), the exchange was back trading above 7,300 the day before DITO’s SRO offer period was extended “because COVID”. The market was at 7,197 the day DITO announced the SRO, was at 7,254 the day the SRO offer period began (+1%), was at 7,261 (still +1%) the day the offer period was extended, and 7,288 (still +1%) the day the extended offer period ended. Relative to December 31’s close, the market is up 3.4% year-to-date. The market is doing fine.

Best interest of minority shareholders? As late as this January 18 press release, DITO was still pitching the SRO to retail investors as a “chance to grow their investment in DITO”, with a headline touting the SRO as an opportunity for shareholders to get “shares at an attractive discount”. DITO implied that there was heavy interest in the offering from other shareholders by saying that it received “numerous requests” from shareholders for an extension of the offer period. DITO was still actively trying to sell the SRO shares as beneficial to minority investors. What changed?

Chinese loans: DITO is quick to waive concerns about the deferment by pointing to the $4 billion in loans that the company has “secured” from Chinese lenders, but doesn’t actually do any of the work to explain how this debt helps the investors that were already pushed to act in defense of their positions in a transaction that was initiated by DITO in the first place. (Remember, non-participation in the SRO would have resulted in dilution to any existing shareholders.) Is it cheaper to minority investors? Does it provide a better return? We don’t know, because DITO hasn’t provided any information on the term, rate, or conditions of the loans, and how this would be better/cheaper than an equity raise.

What’s next? DITO says that it will “relaunch an offering to interested investors” once “the market continues to see the growth of the Company’s business” and the Philippine capital markets “stabilize”. It’s interesting to note here the use of the words “an offering”, and not “the offering”. DITO specifically refers to the “relaunching” of the SRO as just one of the many options that it will consider as part of that fundraising effort, including what it refers to as “a public offer” (perhaps a follow-on offering?) and “other fundraising means”. DITO did not provide a timeframe for when this fundraising exercise would resume, or elaborate on what it means by “other fundraising means” aside from an SRO, FOO, and the new debt from Chinese lenders. 

Halt lifted today at 10:30am: Despite providing no contextual information to support the contention that the deferment was in the best interest of minority shareholders, the PSE disclosed that it would lift the trading halt at 10:30am today. The PSE reserved the right to pursue “regulatory action” against DITO, but did not say what this action might entail, when it would occur, or what DITO shareholders might expect as a result of it. Uncertainty abounds for DITO shareholders, both from DITO’s actions but also from the PSE’s vague responses.

MB BOTTOM-LINE

DITO says that the canceled SRO was in our best interests, but tells us nothing about the potential debt financing or “alternative financial arrangements” to allow minority shareholders to make that determination on their own. With respect to the market itself, in the time since DITO announced the SRO, four companies, Philippine Estates [PHES 0.47 2.08%]Haus Talk [HTI 1.25 2.34%]Solar Philippines NEC [SPNEC 2.22 2.30%], and Figaro Coffee [FCG 0.83 2.35%] conducted major equity transactions, together raising over P5.5 billion.

Another company, Citicore REIT [CREIT 2.55 pre-IPO] starts its offer period today to raise P6 billion.

The “market” wasn’t weak. The capital markets are fine. This activity suggests that there’s nothing wrong with “the market” or its interest in compelling financial opportunities.

Instead, it suggests that there was probably something wrong with the DITO offer itself. That large institutional investors were willing to sustain significant dilution instead of pay P4.88 per SRO share would indicate to me that perhaps the offering was mispriced, that it was too expensive for the potential return.

While I don’t know for certain that this is the case (I’m not an institutional investor, and I don’t know what they’re all individually thinking about with respect to DITO), the stock’s price has steadily melted to the point where the SRO offer price represents only a 4% discount from the P5.08/share market price.

I don’t know what will happen with the DITO stock today, tomorrow, or next week, but the trendline from a year ago has been nothing but down, and perhaps the lack of interest is due to that. DITO’s underlying price, not the market itself, is what opened 2022 on a “negative note”.

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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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