Thursday, March 24, 2011

PLDT Set to Buy Digitel


Earlier today, I received the following email from one of my former students:

Sir! I need your advise! hahahaha.

kasi my dad told me na there are rumors daw that pldt is buying digitel and people are buying digitel stocks now. I want to buy sana kaso, should I? HAHAHAHA. 1.66 lang naman ang price per share kaya cheap investment siya but still, baka masayang pera ko... hahaha.

So, how does one go about analyzing this situation? Of course, the ordinary investor (that is, someone like me) would not have a reliable way of confirming if the rumor is true. But let's say, just for the sake of argument, that it is: let's assume that PLDT is indeed planning to buy Digitel soon but hasn't announced it yet. Given that, and with the information at our disposal, what would be the best course of action?

As with any purchase or investment decision, perhaps what we should consider first is the price of the asset in question. Is the stock still cheap enough to allow for considerable gains in the near future, or has the price already been substantially driven up by those who acted on the rumor ahead of the rest of us? Here's the stock price of Digitel in the past 6 months:

That's a pretty high 23% jump from a week ago, don't you think? Especially given what happened in Japan and what has been happening in the Middle East in the past few weeks. So does this mean today's closing price of 1.62 already reflects the acquisition rumor? Unfortunately, things aren't as clear cut as that, especially if we consider that six days ago, on March 18, Digitel announced a 65% year-on-year increase in net income. With this information, the 23% increase in stock price now doesn't seem too unreasonable, does it?

Perhaps we should look at other signs, like similar transactions that happened in the recent past. Unless you live under a rock or you're always too busy monitoring your Facebook news feed, you should have heard something about Alliance Global's purchase of a 60% stake in Fil-Estate Land late last year. Here are some important details of that transaction:

The deal was announced on December 22, 2010, with an offer price of 1 peso per share; Fil-Estate Land's stock closed at 0.92 per share the same day, 21% higher than its closing price the previous week of 0.76. In the following 5 weeks, the stock shot up to 2.41, a 217% increase from the pre-deal price. Today, the stock has stabilized close to 2 pesos per share, which is still 100% more than the offer price. It looks like everyone but me has become filthy rich from this deal.

What has this got to do with the Digitel rumor? Well, since history has a knack of repeating itself (sometimes), there's a sizable chance that investors who would buy Digitel shares before the deal is announced would earn a handsome payoff. But even without the Fil-Estate example, high returns for those who would be in the game before the announcement would not be out of the question; whenever a firm decides to buy another firm, the buyer always pays a premium to get what it wants. 

Why would PLDT want to pay a higher price for Digitel stock than what the market dictates? The acquisition of Digitel, should it happen, would greatly reduce the competition in the local telecoms arena and turn it into a virtual monopoly. Sun Cellular in the hands of MVP would further strengthen Smart's position as the market leader, and Globe would become more of a lame duck than it already is. If the deal pushes through, you may have to say goodbye to the all-text/all-call promos that you've enjoyed over the years real soon; the sweetest advantage of being the undisputed market leader is that you can pretty much jack up prices anytime you want, especially in a regulatory environment that is as inutile as ours.

Whoa, hold your horses, some of you may say. What about antitrust? Surely, the government would not allow something like this to happen? Click this link for the answer.

So what was my reply to my student?

If you believe the rumor, buy shares ASAP.

But remember, that's a very big IF.

And if you want really do your homework and look at actual numbers, here are some helpful sources information about Digitel:

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