The inside story: How San Miguel worked its way into Meralco's board

By Lala Rimando,

Posted at Dec 11 2008 06:20 PM | Updated as of Dec 12 2008 02:20 AM

The news that food and drinks giant San Miguel Corporation was buying the stake of the government pension fund in Manila Electric Company (Meralco) shocked not just the elite Lopez family who controls Meralco, but also businessman Manuel Pangilinan.
Right before the October 27 late afternoon disclosure of San Miguel to the stock exchange that it purchased a stake in Meralco, Pangilinan, an influential chairman of one of the country's biggest conglomerate and largest telecommunications provider, was reportedly confident of clinching that same deal.
According to various sources knowledgeable with what went on, Pangilinan had previously worked out a deal with government contacts to purchase the 27 percent stake of Government Service Insurance System (GSIS) in Meralco.
And as courtesy to the Lopezes whom he expected to be dealing with after his company's buy in, he made efforts to meet with family representatives. He laid down his cards to them: He was willing to buy GSIS's stake for about P90 per share on cash basis. For that price, he required a due diligence and pushed for a management overhaul.
On the other hand, San Miguel's winning offer was also at P90 a share but payable in three years. There was neither a due diligence requirement, nor clear indication yet of changes in management.
GSIS president and general manager Winston Garcia said they sold their 27 percent stake in the country's biggest power retailer since "the price was right."
By putting together accounts of various sources who have been intimately familiar with how San Miguel secured the government's stake in Meralco, the inside story of the deal stands as another illustration of how business is conducted in the Philippines.
San Miguel ups the ante
San Miguel's entry into Meralco marked the government's retreat from its more than three-decade hold of a power distributor that had a checkered past.
Meralco was folded under government's control in the 1970's, when former President Ferdinand Marcos decided to assign all power and electricity-related rights to a government monopoly, the National Power Corporation.
In the eighties, when Marcos was booted out from power, the Lopezes regained control of Meralco. But the government, through state-owned financial institutions, including GSIS, continued to keep a stake that represents the public money invested to grow the business in the 70's and early 80's.
The government's stake in Meralco has long been in the list of government assets to be privatized. The proceeds were to help beef up the government's coffers.
In January 2008, a piece of the government's aggregate 32 stake in Meralco was put on the auction bloc. But GSIS snapped it up, increasing its own stake from 12 percent to 22 percent.
After a contentious stockholders meeting and election of board representatives in May 27 this year, GSIS further increased its stake to 27 percent.
That's what both Pangilinan and San Miguel eyed.
Since the announcement that San Miguel bagged the deal for GSIS's 27 percent stake in Meralco, it has increased the ante. An entity widely considered allied to San Miguel's key officials bought the remaining government's 10 percent held by state-owned pension fund Social Security System (SSS), and financial institutions Land bank of the Philippines and Development Bank of the Philippines.
The buying entity, named in news reports last week, is called Global 5000 Investment Corp.
According to Securities and Exchange Commission (SEC) records, Global 5000 was incorporated last January 23, 2008 as a financial holding company.
Its phone number listed in the SEC documents is the trunkline of San Miguel.
Global 5000's incorporators and officers are also closely linked to San Miguel. The SEC records show the names of key individuals, like Roberto V. Ongpin, Inigo Zobel, and Joselito Campos.
Zobel is a director in San Miguel and its various food, drinks, and properties subsidiaries. On the other hand, Campos who left his family's pharmaceutical company, United Laboratories, to head Del Monte Pacific Ltd., previously partnered with San Miguel to form NutriAsia, a group of food companies.
Of the three, however, Ongpin is a give-away. Ongpin, a former trade and industry minister, and San Miguel's chairman, Eduarado Cojuangco go a long way back. They were both allies of President Marcos. Ongpin also helped access donors for Cojuangco's campaign when the latter joined the 1992 presidential election.
More recently, Ongpin paved the way for the entry of London-based investment firm, Ashmore group, his business partner in a technology venture, in the privatization of Petron, the country's biggest oil refiner and retailer. Ashmore and San Miguel, which considered directly bidding for the rest of government's stake in Petron, have reportedly made an agreement that as soon as Ashmore finalizes its purchase of about 90 percent stake in Petron, it would turn around and sell a majority stake in Petron to San Miguel.
These alliances between the top honchos of San Miguel and Ashmore is perceived by many as the reason why Global 5000's purchase of the government's remaining stake in Meralco mirrors the same structure and price as San Miguel's direct purchase. Global 5000 is also buying the Meralco shares from the government at P90 per share, payable in four installments.
Noteworthy, however, is that by buying the 37 percent stake in two chunks, San Miguel dodges the SEC rule that acquisition of more than 35 percent of a listed company requires the buyer to offer the same P90 per share value to all other stockholders.
Considering Meralco's stock price hovered below P60 per share in recent days, the San Miguel and Global 5000 dodged what could be a very expensive deal.
San Miguel
Meantime, how San Miguel sneaked into what was already an almost done deal between the government and Pangilinan in October puts San Miguel's next moves into context.
San Miguel is led by shrewd and politically influential businessman, Eduardo "Danding" Cojuangco Jr., and the company's mover and shaker, Ramon Ang, the president and chief executive officer.
Cojuangco and Ang expertly maneuvered San Miguel back to financial health since Cojuangco re-assumed control of one of Southeast Asia's largest conglomerates a few days after former president Joseph Estrada was sworn into office. Cojuangco helped bankroll Estrada's 1998 presidential campaign.
In the run up to the controversial—and litigious—May 27 Meralco stockholders meeting where GSIS's Garcia and the Lopezes battled for control of the 11-man board, Ang told reporters that they were not interested in Meralco.
Weeks before May 27, the Lopezes who again feared the possibility of losing their empire's crown jewel to a hostile government, tried several ways to get Garcia out of the board.
They approached several potential "friendly" partners that could then dangle an attractive purchase price to Garcia so the latter would give up its Meralco stake and stop a continuous barrage of bad press that depicted the Lopezes and their allies as bad managers and the reason for high electricity prices.
San Miguel's Ang was one of those that the Lopezes approached. But according to sources familiar with the Lopez's efforts at that time, Ang eventually backed out.
However, Ang reportedly promised to the Lopez family representatives that if ever they would be interested in buying a stake in and taking over Meralco, they would make an effort to inform the Lopez family members first.
According to the sources, Ang did just that before the morning of October 27, a Monday, when Meralco's board had a scheduled monthly board meeting. 
The Lopezes and their allies in the board were expecting Garcia to announce his resignation during the board meeting, as Ang reportedly said would happen, paving the way for the announcement of San Miguel representative's entry into the board.
When Garcia did not resign during the morning meeting, the Lopezes and their allies assumed the deal between GSIS's Garcia and San Miguel's Ang did not push through.
Apparently, it did.
Pangilinan vs. Ang
The San Miguel-GSIS deal was hatched and sealed just on the weekend before the October 27 Meralco board meeting.
When the camp of Ang reportedly learned that Pangilinan and the government were on the verge of sealing the sale, he reportedly flew his private plane from Manila to the island province of Cebu, where Garcia spends his weekends.
The face-to-face talk with Garcia, coupled with reported phone calls to other decision makers, helped Ang rip the deal out of Pangilinan's control.
Why Ang was so eager to clinch the deal from Pangilinan is in itself a story.
The two have previously battled in August for another Lopez asset that was for sale: Manila North Tollways Corp., the franchise holder for the 83.7-kilometer main artery linking Manila to the northern Philippines.
According to another source familiar with the transaction, Ramon Ang wanted to buy the business, to the extent of offering a premium over the P12.26 billion bid of Metro Pacific Investments Corp (MPIC), which Pangilinan chairs.
Ang was also reportedly willing to forego the usual due diligence effort. 
The premium price almost made the Lopezes reconsider. The Lopez's business empire is highly leveraged. Several energy and communications businesses have raked in billion-peso loans, but foreign exchange volatility and weak revenues made them miss profit targets. This has forced the conglomerate to sell non-core assets to pay down debts and boost cash position.
In a meeting where the Lopezes, their allies, and consultants pondered San Miguel's juicy offer, the investment bankers opined that Ang's offer was "not a genuine offer," a source present in that meeting told
Ang's offer reportedly came too late, since the bidding had already reached its final stages. The bankers reportedly stressed to the Lopezes that the sale process has even been extended to accommodate Ang's previous request for a late-bid submission. Ang and his team apparently did not make it to the extended deadline for the bid and the bid committee proceeded to the final stages when they were about to award the sale to MPIC already. It was already during the final stages when Ang's more attractive bid turned up.
It was not an easy decision. It was even raised that Lopezes' cable arm, Sky Cable, once had a conflict with Pangilinan, who bought one-third of Sky Cable many years ago. Pangilinan was hoping to eventually take control of Sky Cable, which could play a role in his vision of converging the cable with the fiber optic and new technology infrastructure of telephone communications giant, Philippine Long Distance Telephone Company, which he also chairs. That business deal, however, turned sour.
Despite the Sky Cable experience with Pangilinan, the Lopezes did have another successful transaction with Pangilinan. The Lopezes successfully got out of Maynilad, which was not a profitable water business at the time they were operating it, when Pangilinan's MPIC assumed the Lopezes contract with the government.
At the end of the meeting, Oscar Lopez, the family patriarch reportedly said that they have already committed the sale to MPIC and that it was not honorable to back out.
MPIC sealed the tollways business deal in November.
With Pangilinan claiming victory for the tollways business, sources say Ang would naturally exert all means to beat Pangilinan to the draw, this time with a bigger catch: Meralco.
And this time, the Lopezes had no say in choosing the buyer. It was a transaction that involved a change of hands between the government entities and San Miguel.
Political capital
However, a nagging question remains: Why would the government choose San Miguel over MPIC for its stake in Meralco?
All things being equal, both San Miguel and MPIC are cash rich. San Miguel has a cash horde of about $4 billion from selling its stake in several assets here and abroad, while MPIC has the financial backing of Hongkong-based conglomerate, First Pacific Holdings Inc.
And assuming that the government would also like to protect the interests of the public shareholders of Meralco, the electricity company's business has a strategic fit with either San Miguel or MPIC.
Meralco, which is the country's biggest power retailer and plays a strategic role in the power reform agenda, fits into the current efforts of San Miguel to gain a stronghold in the power sector, one of the high-growth businesses it is diversifying to.
MPIC, on the other hand, hopes to take advantage of Meralco's infrastructure network to complement its own telecommunication business' network.
But on a pure financial basis, the reported cash transaction offer of MPIC for the Meralco purchase seems better than San Miguel's three-year installment package.
Thus, some political economy observers have offered a possible explanation: San Miguel has political capital—something that MPIC may lack.
Cojuangco is an influential figure in Nationalist People's Coalition (NPC), a political party that could potentially tip the balance of power in the 2010 national elections.
NPC has a party backbone that either the administration or the opposition could tap. It could even field a vice presidential candidate.
As of writing, San Miguel has yet to fill the four Meralco board seats allocated to the state-owned institutions, led by GSIS.
It would be worthy to watch how the former Marcos era foes—the Lopez family and the tandem of Cojuangco, Ongpin, and now with Ang in the picture—would carry on a history of power struggle, this time over just one crucial power asset.
It would be an astounding feat if they could actually work together in peace. - with research from Leilani Chavez