Ho-hum. Yawwn.
Excuse me. I know it is impolite to yawn in front of people but I was trying to make some sense of an M & A activity in the energy sector which was supposed to inject life to two of the hottest players in the industry before I nearly dozed off. Let see…
Here it is. A week prior to the big announcement, Francis Giles Puno, First Philippine Holdings Corp. (PSE: FPH) chief finance officer told reporters “we have received some strong expressions of interests from both foreign and local companies” to acquire the 112-MW Pantabangan-Masiway complex its subsidiary, First Gen Corp. (PSE:FGEN) owns through the First Gen Hydro Power Corp. (FGHPC).
Local punters and self-styled analysts expect First Gen to realize between $129 million and $208 million for the asset for a handsome profit. After all, it acquired the hydro plants for a measly $105 million in November 2006 from the Power Sector Assets and Liabilities Management Corp. (PSALM), the privatization arm of the government for the power assets of National Power Corp. (NPC).
A week later, the “foreign and local interests” turned out to be Energy Development Corp. (PSE:EDC)—First Gen’s own subsidiary! The tag price for the complex was a whooping $240 million, more than double the acquisition price.
Actually, First Gen is selling 60% of First Hydro to EDC which is valued at approximately $105 million. First Gen claims that the transaction emanated from an unsolicited offer made by EDC to it. Which is strange, since First Gen effectively owns EDC.
As if to assure us, bystanders, that the deal is good for EDC, Punongbayan and Araullo, the advisory firm tasked to value the transaction said “this ($240 M) is below the range of values we have derived amounting to $262.9 million to $312.4 million.” The decimal point is real; that’s how accurate they are. And to make sure we understand everything, it interpreted its own finding by saying the lower enterprise value “is favorable to EDC from a financial point of view.”
Really?
The higher appraised value of the hydro assets was justified ostensibly because the Lopez group already made some refurbishments that enhanced the operating efficiencies of the two plants.
What did the Lopez group do aside from holding for almost two years the right to operate the assets since winning the bid?
FGHPC has selected Austrian firm Andritz VA Tech Hydro (GmbH) only in February this year to refurbish and upgrade the Pantabangan hydroelectric plant. According to Andritz, the contract calls for the “replacement of the two 52 MW Francis turbines, new generator stator windings and the modernization of the complete electrical equipment including governor system, unit automation with Scada system, new static excitation, generator and transformer protection, new medium-voltage switchgear and low-voltage distribution.”
But the first unit will only be rehabilitated between July and December 2009, while that of the second unit will only be completed by December 2010. There are no misprints of the years mentioned.
If the assets were that good, why is FGEN shuffling it around? For one, it will get $105 million in cash which it could use to pare down its heavy debt load. As of end June, FGEN has $1.6 billion of long-term debt against an equity of $1.2 billion for a long-term debt-to-equity ratio of 1.33. For an infrastructure company in a mature market, this is already a disaster in the making. We don’t appear to be very bearish; we exclude the current liabilities of $820 million which if considered would jack up the total debt-to-equity to 2 or a gearing of 200%!
When the dust clears, the scenario would be something like this: FGEN gets $105-M cash from EDC to pay off a small portion of its debt. That would improve its balance sheet somewhat. EDC becomes a trailblazer into hydro--but it has to wait for two years before some profits from hydro starts to trickle in. It will now pay for the rehabilitation of the hydro complex. All without ceding an iota of control to outsiders.
See how accounting could do wonders?
Because the $105-M cash originates from EDC—surely, the geothermal power producer gets something in return.
Stephen CuUnjieng, vice-chairman for Southeast Asia at Macquarie, which advised EDC, justified the purchase this way: “This is not just about adding 112-MW of power. The reservoir means the hydro plant can expand without having to build a new dam and there will be internal organic growth over the next five years. So EDC becomes a company offering stability with growth rather than just stability, while keeping its green profile.”
A report assures the minority shareholders, among them some friends, that the deal is good for them. They cannot say or do anything during the ceremonial special stockholders meeting to approve the deal. Their combined shares are insignificant compared to those of the majority bloc.
What a brilliant move by EDC. I have always regarded my former employer to be a pro-active and dynamic organization which could seize opportunities the moment they cut across its path, and this should be one of them. So the market (investors) should be jumping for joy.
After the deal was announced, FGEN’s share price promptly fell 4.8% to P15 per share while EDC’s dropped 5.7% to P3.30. Of course, this has to be nothing to do with the deal considering that the market has slumped so much due to the lingering worry of a global economic slowdown. As it were, the share prices for both listed companies are still expensive.
Paul Aquino, EDC’s president and CEO chimed in with his view saying “our entry into hydro power clearly complements our portfolio and provides EDC with vast opportunities for growth.”
But Pantabangan started operating in 1977 and by this time the reservoir should already be highly silted. So First Gen—now EDC—should be hard-pressed to recover the original output of 104 MW.
How could the renewable energy portfolio of EDC grow with Pantabangan? It cannot even apply for carbon credits under the Clean Development Mechanism (CDM) of the Kyoto Protocol because it is already there. It fails the basic requirement of additionality. The term means that a carbon offset credits should be “in addition to” to what is avoided greenhouse gas (GHG) emissions if the project were not implemented in the first place.
EDC is supposed to be developing a wind farm for up to 86 MW in Burgos, Ilocos Norte for years now. Northwind Development Corp. which came in later into the industry, promptly erected the 24-MW Bangui Bay, Ilocos Norte wind project way back in 2006. Now its majestic photos appear frequently on Philippine postcards and on Flickr.
Now would you blame me for falling asleep? Wait, that’s a fine idea. Please wake me up at 10 minutes before 5 or when the boss comes to our cubicles, whichever comes first.
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