The Philippine Online Chronicles

The battle for the Manila Electric Company is over and the Lopez family can breathe easy. The ex-owners of Meralco, in an alliance with PLDT chair Manuel Pangilinan , now cumulatively own 47 percent of the company's 1.115 billion outstanding shares.

This prevents the allies of San Miguel Corp, headed by Ramon Ang from gaining majority shares by a mere 4 percent points. Nonetheless, the food and beverages conglomerate maintains sufficient shares to make them significant players in the Meralco boardroom.

The result is a tenuous balance of power that has reshaped the face of Philippine business. So ended what the media has called the Meralco takeover, although Meralco has insistently denied such a takeover was ever in effect.

On the other hand, the Lopez family can sit pretty with their maintained managerial powers and 13.4 percent share. According to Oscar Lopez “If other opportunities arise that are significantly more attractive than Meralco, then we have the option to sell down or sell out at significantly higher values.”

The first up to buy would be none other than their ally Pangilinan who has openly expressed interest in furthering PLDT's ownership of Meralco. It would be another step in expanding his corporate empire.

The takeover, part 1

The issue that gave impetus to all these events was that of high power rates. In 2008, the government put Meralco under fire when it was found that the Philippines had the highest power rates in Asia, second only to Japan.

Speaking for the government was GSIS president Wilson Garcia, who called for a “change in management” in Meralco, and also for it to present its financial records. At the time, GSIS owned 27 percent of Meralco shares – a sizeable chunk considering all other government agencies together owned only around 10 percent. This signaled what many observers tagged as an aggressive attempt by the government to take over the management of Meralco, although this was denied by GMA.

Julius F. Fortuna, wrote in his Manila Times online column of his belief that it was not a government takeover but an honest attempt to address “valid public issues, like overcharging of consumers by Meralco ... hidden costs and accounting fraud ... bad practices like buying electricity from its allied firms and lack of transparency in its records.”

On the other hand, RedBlueThoughts called it a “predatory” move on the part of the government. Prudent Investment Newsletters referred to it as “a bad precedent.” “Instead of looking for profitability, efficiency and productivity, the management direction of Meralco will be highly political in nature, aimed at gratifying to the whims of those in power.”

On October 28, GSIS suddenly sold all its shares to the San Miguel Corporation at the unusual price of P90 per share, more than double the Meralco closing price of P44.50 the previous week. The sale was for a total of P30 billion that would be paid off over three years.

Blogger Warrior Lawyer and columnist Dan Mariano both described this transaction as “fishy,” the latter quoting Albay governor Joey Salceda who said “Something is not right with the picture... Such moves in the middle of a market meltdown would only heighten suspicions rather tha[n] assure. Smells like a pre-nuptial deal.”

Mariano added that although at first glance GSIS making billions from the sale seemed like a boon for the insurance service members, San Miguel would not be paying interest.

One also has to consider that Garcia was not just president of GSIS, but a board member of San Miguel. According to Mariano, “Experts pointed out that ... SMC would actually pay GSIS just P2.50 monthly for every share that the conglomerate acquired.”

Inquirer.net's Daxim Lucas points out that the connection between San Miguel and the Philippine government through GSIS might have go back further than apparent. Lucas quotes Simeon Marcelo who mentions the involvement of Eduardo “Danding” Cojuangco, Jr., chariman of San Miguel Corporation whose ties with the government go deep. He himself will be leading the Nationalist People’s Coalition bid during the 2010 elections.

According to Marcelo, “From the beginning, we were telling our clients that it was Cojuangco and his group that really wanted Meralco.” Teddy Casino of Bayan Muna adds that “What happened was not just state-sanctioned. It was state-initiated.”

San Miguel on its own, however, would also have use for a money pot like Meralco. The company is currently entering a new stage of evolution, with Cojuangco selling millions in assets, including its famous beer enterprise, to raise funds for diversifying into other industries such as energy and mining, infrastructure and heavy industry finance, and supposedly telecommunications – which would make ownership of the country's largest electric distributor appropriate.

MVP's entrance

Not everyone agrees that GSIS acted as a wedge for San Miguel to enter into a state-initiated takeover of Meralco. Philippine Stock Exchange director Vivian Yuchengco insists that “GSIS looked at it purely as an investment,” adding that “the stock was very cheap.”

San Miguel's president Ramon Ang also maintained that “we are here investing in support of Meralco, not to take over.”

Nonetheless, the Lopezes were not taking this lying down. The greatest threat was that while their shares added up to 31 percent of Meralco, San Miguel had gone up to 38 percent. If it came down to who would have more influence in deciding Meralco's management, San Miguel would have the upper hand.

In reaction to what appeared to be a joint attack on their territory by the government and San Miguel, the Lopezes forged an agreement with PLDT, led by Manuel Pangilinan, to stake their shares together. According to securities analyst Jose Vistan, PLDT was “clearly allying with the Lopezes.”

The power family that has been a part of Meralco since 1962 sold almost 20 percent of their shares to PLDT, retaining only a relatively minuscule 13.4 percent for themselves. However, this was enough to bring their total shares to 43.5 percent, and the majority ownership that would allow them to keep control.

When asked about his decision, Pangilinan says it is a matter of synergy. For one thing, PLDT and Meralco are closely tied at the operational level. PLDT telephone cables, for instance, are laid along Meralco electric posts. There is also potential for PLDT to tap into Meralco's significant fiber optic network in Metro Manila.

Oscar Lopez agrees that the alliance is a strategic one. “From being the country’s dominant distributor of electricity, Meralco now has the potential to become a participant in the wires platform for multi-media products in the broadband world of tomorrow,” he said.

Because of this, Pangilinan has been called the 'White Knight' of Meralco and the Lopezes. But observers online have also described it as more of a 'marriage of convenience'. On Patricio Mangubat's blog, he suggests that it's less a matter of the Lopezes seeing Pangilinan as a friend, than seeing all other players as historical enemies. Cojuangco of San Miguel was a Marcos crony. GMA supposedly set Wilson Garcia on Meralco.

Others on the web suggest that the effects of the alliance reaches even to the 2010 elections. On the blog At Midfield, speculation goes that the Lopez family aren't just protecting Meralco from Cojuangco and his possible alllies in the government. “The Lopezes are scrambling to prevent an all-too-obvious play by Mr. Eduardo ‘Danding’ Cojuangco to gain too much influence in their business empire that includes the politically-potent ABS-CBN media empire.” ABS-CBN will undoubtedly be a major voice in the electoral frenzy to come. Another matter that is brought to surface are the political ties between GMA and Cojuangco.

Despite the alignment of Pangilinan and the Lopez family, San Miguel kept at the offensive from the opposite end of the field. In a talk with the Manila Times, Ang had little to say about the new partnership. “Do you believe Lopez and the other side will be good friends forever?” he said. “I don’t think so.”

Endgame

By May 14, 2009, San Miguel had since increased their shares from 27 to 43 percent flat through cooperation with their allies among Meralco share holders. This brought them within breathing distance of majority ownership of Meralco.

This set the stage for what was widely speculated would be a tense show-down during the May 26 Meralco shareholders meeting. It was precisely a year since that meeting when Wilson Garcia made his call for a change in management, setting off the chain of events leading up to the Lopez family fighting to keep afloat.

Contrary to expectation, it was described as “a boring meeting” by Elpidio Ibañez, president of First Philippine Holdings Corp., part of the Lopez group.

Instead, the Meralco shareholders witnessed three of the country's most powerful businessmen go up on stage together in what appeared to be complete solidarity. Manuel Lopez, Manuel Pangilinan and Ramon Ang came forward and “voiced out their support for each other and shared a common goal ... to continue the successful run of Meralco.” The meeting itself lasted little more than two hours.

Pangilinan announced that together with the shares bought by FPHC, the PLDT-Lopez bloc's stake had risen to 47 percent. It was also decided that chairmanship of the board would remain with Manolo Lopez.

5 out of 11 seats on Meralco's board of directors went to representatives of the PLDT-Lopez side, while 4 went to the San Miguel block. The last two are reserved for independent directors.

Although a truce seems to have been achieved among the three, business analysts would sooner describe it as an uneasy alliance. "This is the first time that these groups have joined together so it will take time to reach that comfort level," said Astro del Castillo, managing director of First Grade Holdings Inc.

But the players are putting on their game faces. "We are privileged to be a part of Meralco,” Ang said. “We are not here to take over. We fully support Manolo Lopez and as long as he stays, our investment in Meralco also stays,"

According to Lopez, “With the synergies amongst the three groups, we can expect a more efficient, a more dynamic organization.”

In an interview with Bloomberg, Fitz Aclan of Banco de Oro Unibank Inc. also commented that Pangilinan's presence will benefit Meralco. “This management team was able to successfully turn around PLDT. We’ll see a more efficient balance sheet at Meralco.”

Aftermath

Now that the smoke has cleared with the Lopezes still on top, what happens next?

Analyst Emeterio Sd. Perez says the alliance will have a positive effect on the business landscape of the Philippines. He points to a more widespread alliance composed of an interlocking network of companies with representatives now sitting on the new board of Meralco.

Despite Ang's show of goodwill, ABS-CBN news, the Lopez's media arm, insists that the “boardroom saga” will go on. “Since it had missed the procedural deadlines to assert control during the stockholder meeting this year, San Miguel could still go for more shares at the open market until it has enough to qualify for additional seats in the Meralco boardroom. (A board seat in Meralco is worth about P10 billion based on current prices). Thus, the fireworks may not happen [during the shareholders meeting] but in board meetings afterwards.”

Photo of the bust of Eugenio Lopez Sr. taken from roxj on Flickr.

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