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Stock Commentary

Quick Take: San Miguel buys Eagle and 4 more market updates

Merkado Barkada
Quick Take: San Miguel buys Eagle and 4 more market updates
Did those directors participate in any of the other activities of the board with respect to the acquisition of EAGLE?
Merkado Barkada

San Miguel [SMC 96.65 0.15%] [link] plans to purchase 88.5% of Eagle Cement [EAGLE 15.40 3.36%], for a price of P22.02 per share. Assuming 100% of the shares purchased are secondary, this would result in SMC paying P97.4 billion to Ramon Ang, John Paul Ang, Monica Ang, and Far East Holdings Incorporated. For the record, Ramon Ang owns SMC and EAGLE, and John Paul Ang is on SMC board and is President and Chairman of EAGLE.

MB Quick Take: Don’t worry about that conflict of interest! SMC was quick to point out that neither Ramon Ang nor John Paul Ang participated in the SMC board vote on whether to acquire EAGLE, so, it’s fine. Just another example of companies using shareholder cash and assets to buy things from themselves. For these types of transactions, I always assume that the deal is “stank” until it’s proven to be clean. As an investor, I have no presumption of regularity for deals where the potential conflict of interest is erased by the conflicted directors just simply not casting the final vote. Did those directors participate in any of the other activities of the board with respect to the acquisition of EAGLE? When the name popped up in strategic discussions, did Ramon and John Paul cover their ears or leave the room instantly? If not, if they had any influence over the process in any way, then the abstention from the final vote is just performative ethics and nothing more. Aside from the valuation question for SMC and EAGLE shareholders will be the Philippine Competition Commission (PCC) and its review of the transaction. Remember what happened the last time SMC tried to acquire a large cement manufacturer? PCC killed the deal between SMC and Holcim [HLCM 3.80 1.33%] in a stunning display of pro-consumer advocacy and institutional health. Will we get a repeat performance? 
 

NOW Corp [NOW 0.90] [link], Mel Velarde’s parent company that owns fringe telco, Now Telecom, said that it plans to spend “up to” P7.8 billion over the next 10 years to build 100 base stations and beef up its “digital infrastructure”. NOW said that P1.2 billion of that amount could be spent in the next two years on expansion projects. NOW’s board also gave its executives the authority to negotiate a potential equity interest in News and Entertainment Network Corporation (Newsnet) as part of NOW’s “thrust” to strengthen its “core business”.

MB Quick Take: This company is one that exists in the “believe it when I see it” bucket. The number sounds big, but it’s only P780 million per year of average spending, and it’s even spending slower than that for the first two years. Dito Telecommunity [DITO 2.84 1.43%] planned to spend P50 billion this year alone as part of its network roll-out. Globe [GLO 2150.00 7.61%] planned for over P50 billion in capex this year as well, and they’re not starting from nothing. That’s on top of the nation-wide network they already have. PLDT’s [TEL 1528.00 2.55%] planned capex was P85 billion. I’m not saying that NOW can’t develop a good business to serve a handful of customers, but I am saying that I’m going to wait for NOW shovels to get in the ground to pay much attention. It costs a lot less than P7.8 billion to talk about spending P7.8 billion.
 

DMCI [DMC 10.34 5.51%] [link] “bags” its first portion of the Metro Manila Subway project (Contract Package 102), estimated to be worth P21 billion. The Consunji Family’s infrastructure construction company said that the project is expected to take 67 months to complete (~5.5 years), and will result in the creation of the Quezon Avenue and East Avenue underground stations.

MB Quick Take: Unlike whatever is going on in Cavite with the Sangley Point mess, this entire Metro Manila Subway project is being built under the watchful eye of the Japan International Cooperation Agency (JICA), and JICA doesn’t mess around when it comes to infrastructure development. The funding sources are properly accounted-for, the schedules are reasonable and attainable, and there are alarmingly few opportunities for shenanigans and monkey business. Investors liked the news, pushing the stock up more than 4% in early trading on Tuesday.
 

San Miguel [SMC 96.65 0.15%] [link] and Meralco [MER 290.20 4.69%] lost their joint plea to the Energy Regulatory Commission (ERC) to raise power rates, due to drastic changes in the economics of natural gas and coal. SMC had signed a fixed price contract to mine coal and send it to MER at $60/ton, but now prices are closer to $400/ton. One of SMC’s power plants, which had relied on natural gas from the Malampaya field, was forced to source fuel from the open market at higher prices. The two situations had resulted in losses of approximately P15 billion. SMC and MER were seeking a temporary rate hike of P0.30 per kilowatt hour to recoup some of the losses. The ERC denied the request, saying that SMC failed to operate as a “prudent business entity” to manage obvious risks in its various contractual obligations, citing the “common knowledge” of the Malampaya project’s dwindling supply. SMC had said that it would terminate its energy supply contracts with MER if it did not receive relief from the ERC.

MB Quick Take: The first year of law school is full of supply contract problems like these, so it is a little shocking to see such sophisticated parties operating seemingly blind to such enormous price risk, especially on commodities with volatile market prices that can be driven by international events. The “oh my god we never thought coal would get so expensive” problem is one you just don’t expect to see out of SMC and MER, and the ERC’s point about Malampaya is a good one. I’ve been writing about the dwindling supply from that source since this newsletter started in 2019.
 

MB Power Generation Index [link] had one of its biggest single-day gains ever, rising 5% on the news that the ERC plans to re-write the implementing rules of the Renewable Energy Law to allow 100% foreign ownership of renewable energy (RE) companies. The move will super-size the list of potential buyers for RE projects, which will, in turn, provide a wide range of benefits to the big players in the RE industry, such as a larger market for potential sales, and easier, quicker transactions with foreign investors.

MB Quick Take: When foreign investors come to a growth market like ours, they’re often hoping to buy a majority of a target company because it allows them to consider the target company a subsidiary, and incorporate those sweet sweet financials into its own financial statements. Don’t get me wrong, foreign investors would still be interested in a minority stake, but the first quiet question asked after a pitch deck, site tour, and dinner is always, “Is there any appetite to sell a majority stake?” A majority stake commands the highest price. The best valuation. The most enthusiastic interest. For companies like Aboitiz Power [AP 32.45 7.10%] and ACEN [ACEN 5.80 5.07%], who saw their stocks surge on this news, the re-writing of the rules will make sales of all kinds both easier and more profitable. That’s a healthy combination.

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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.

DMCI

EAGLE CEMENT

MERALCO

PHILIPPINE STOCK EXCHANGE

SAN MIGUEL CORP.

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