Lopezes, SMC fight for control of Extelcom

Mary Ann Ll. Reyes, The Philippine Star

Posted at Mar 16 2009 11:51 AM | Updated as of Mar 16 2009 08:18 PM

After Manila Electric Co. (Meralco), the Lopez group and San Miguel Corp. may have found themselves engaged in another battle for control, this time over mobile phone service licensee Express Telecommunications Co. (Extelcom).

Lopez-controlled Marifil Holdings Corp., which claims to still own 46 percent of Extelcom, said it will oppose the planned sale by TransDigital Extel to SMC of its stake in Extelcom and will continue to fight the alleged hostile take-over of Extelcom.

Marifil lawyer Ariel Tuybayan said they will pursue all legal remedies to reverse what they claim is an illegal dilution of their shares in Extelcom from 46 percent to 8 percent. “Marifil is prepared to go all the way to the Supreme Court,” he added.

He pointed out that Marifil was deprived of its property in clear violation of the Corporation Code that requires the vote of shareholders holding at least two thirds of the outstanding capital stock. “How can corporate rehabilitation be abused to deprive a shareholder of its property without its consent?,” he said.

Documents  from the Court of Appeals, where the cases are now pending, disclose that Marifil considers Trans Digital Excel  a “vulture investor” that never funded Extelcom and merely intended to “wrest control of… Extelcom and derive for itself economic profits.”

According to Marifil, Trans Digital did precisely that by selling all its rights in Extelcom to the San Miguel group for an undisclosed profit.

Lopez subsidiary Bayan Telecommunications, another shareholder of Extelcom which has also opposed the rehabilitation plan of the latter, however emphasized that they are  unfazed by the entry of SMC  as a competitor in the telecommunications industry.

Bayan vice president for corporate communications John Rojo said they have never been afraid of competition. “We even welcome it if it will improve the lives of consumers. Our track record has shown that we are willing to enter into mutually beneficial arrangements with our competitors.  But the most important issue here is whether or not the law was violated.  How can a shareholder lose its shares in a company without its consent?  In the absence of wrongdoing, the SEC and the courts should protect shareholder rights,” he emphasized.

Trans Digital entered into a deal with Millicom Cellular S.A., a foreign corporation and minority shareholder in Extelcom whereby Trans Digital acquired Millicom’s shareholder advances.  Trans Digital then prepared a rehabilitation plan that merely provided for the conversion of these advances into equity to control more than 59 percent of Extelcom.

Marifil said that to do this, the capital stock of Extelcom had to be decreased and then increased, resulting in the dilution of Marifil's shareholdings from 46 percent to eight percent.  This would legally require the vote of shareholders holding at least two thirds of the outstanding capital stock, including Marifil’s, the latter pointed out.

Marifil added that despite having acquired its rights from a shareholder, and in what some consider an abuse of the rules on corporate rehabilitation, Trans Digital filed for Extelcom’s rehabilitation as if it were a financial creditor.  This resulted in the circumvention of the Corporation Code requirements on obtaining Marifil’s vote, it said.

It noted that Victor Macalincag, the rehabilitation receiver appointed by Judge Antonio Eugenio of the Manila Regional Trial Court where the rehabilitation proceedings are pending, never communicated with Marifil, even though Marifil is Extelcom’s single largest shareholder.

The Securities and Exchange Commission (SEC) approved the conversion of advances into equity even though the Corporation Code requirements were violated, it added.

Meanwhile, Trans Digital Excel  said Bayan’s  alternative rehabilitation plan for Extelcom will benefit only Bayantel to the prejudice of its bigger shareholders.

Plaridel  Bohol II, retained counsel for Trans Digital, said Bayantel’s plan is primarily designed to complement and enhance the operations of Bayantel, which is also under rehabilitation although it has not had Extelcom’s success in settling its debts.

He said Bayantel wants to use Extelcom’s assigned frequencies in a scheme that does not really aim to revive Extelcom as a viable business concern.

Bohol noted that Bayantel had long given up on Extelcom and allowed its stake to be diluted due to its unwillingness to put in more capital to pay P9 billion in debts.

He said Bayantel had unsuccessfully tried to wrest control of Extelcom shortly after acquiring its 40 percent stake from Marifil Holdings while blocking efforts to make it a successful business by refusing to infuse capital which was critical for business growth, thus forcing other shareholders to advance funds in order to sustain operations.

In addition, because of its earlier representation on the Extelcom Board, Bohol said Bayantel was made privy to Extelcom’s plan to upgrade from its analog AMPS network to the digital GSM standard. Not long after, Bayantel obtained its own GSM frequency assignment to become a direct competitor of Extelcom.

By virtue of a court-approved rehabilitation plan, Bayantel’s stake in the company was decreased along with those of other shareholders in a debt-to-equity conversion scheme designed to wipe out Extelcom’s debts as the first step in bringing the company back into a viable business, he added.

He added that after ignoring the Extelcom rehabilitation proceedings initiated by Trans Digital for several years, Bayantel is now claiming that it was deliberately kept ignorant of the plan, and that it has a better rehabilitation plan for the company.

Bohol pointed out that this contention has already been rejected by both the Manila RTC and CA  which described Bayantel’s claim as “unbelievable.”

He explained that when mismanaged companies pile up huge debt and are unable to pay creditors, creditor banks are left with no choice but to sell their debt papers since they are not in the business of running businesses.

Banks usually sell their debt papers to hedge funds that discuss with management how they will be paid. If satisfied with the repayment plan, they will support management but, if unsatisfied, they will bring company to rehab, he said.

“In remote cases, management is able to retain control of ‘mismanaged’ company. In the case of Bayantel, it restructured its multitude of creditors for a good 19 years and retained control of the company — 19 years is worse than a new loan – it is nearly half a lifetime,” Bohol added.

Bayantel is a classic case of management retaining control of a mismanaged enterprise and debt holders getting repaid in perpetuity. In the case of Extelcom, debt holders and shareholders all took a substantial haircut and, now debt free, Extelcom has a new lease on life, Bohol said.

He noted that while Bayantel keeps on opposing the Extelcom debt-to-equity conversion, it never took any steps to help pay off millions of Extelcom’s debts to the National Telecommunications Commission, Bureau of Internal Revenue and other regulators.

Bohol also noted that, as early as 1999, Bayantel had already written off its interest in Extelcom by setting up a 100 percent provision for loss in value of its investment, citing significant losses that raised doubt on Extelcom’s ability to continue operations.

After this, Bayantel did not even deem it necessary to appoint any representative to sit on the Extelcom Board for many years.

Bohol pointed out that the dilution of shareholdings under the court-approved Extelcom rehabilitation plan did not single out Bayantel but affected all shareholders and creditors.

“All the shareholders, and not just Bayantel, were uniformly diluted by 82 percent of their original shareholdings,” he said.

While the court-approved rehabilitation plan diluted original shareholders, Bohol said it also wiped out billions of pesos in debt that shareholders such as Bayantel were unwilling or unable to address.

“Hence, although there was ‘sharing of pain’ by all shareholders due to the share dilution, all were equally benefitted by the total wipeout of outstanding liabilities,” Bohol said.