Thursday, April 28, 2011

7 Reasons to Upgrade to a(n) (Android) Smartphone

1. It's now cheap enough

I wouldn't have done it were the options just limited to the iPhone, Blackberry, and a few high-end Android devices from HTC and Motorola, which would have cost me anywhere from 25,000 pesos up (open line). But late last year, Chinese electronics firm Huawei (the low-profile manufacturer of the 3G USB modems many of you use) introduced the Ideos U8150 to the market, a full-featured Android 2.2 (Froyo) Smartphone which, at around 7,000 pesos (here in Hong Kong and most probably also in Greenhills) and with very good reviews, then offered the best value for money.

Then came the Samsung Galaxy Mini S5570 about a month ago, the phone I eventually bought. Like the Ideos, it also comes with Android 2.2, but for less than 1,000 pesos more (I bough mine here for around 7,600 pesos) you also get customized Samsung features and a better-looking and better-made phone.

To get the most out of your smartphone, you'll need constant wireless Internet access, either via Wi-Fi or 3G. In the Philippines, unlimited mobile Internet plans are available from any of the major telco players at (somewhat) reasonable prices.

2. GPS + Google Maps

This is actually the primary reason why I decided to upgrade to a smartphone: I was looking for an inexpensive location/navigation system that I could use whenever I explore the city or go biking in unfamiliar places. My phone's GPS capability and the Google Maps application (or the free MapDroyd app if you don't have mobile Internet access) actually works splendidly: whenever I go biking, I have the phone mounted on my bike so I could navigate without having to stop.

3. Fitness trackers

With these applications and your phone's GPS receiver, you can track your physical activities (like walking, running, hiking, and biking) and instantly upload and share your activity details to your friends as soon as you're done.

You can choose from any one of these two fitness tracking apps. The first, and most popular, is Google's MyTracks. My only issue with this application, good as it is, is that it cannot be linked to your Facebook account, a "minor" deficiency that RunKeeper adequately addresses.

4. Google Places

Google Places is not so much a standalone app but an extension of Google Maps; it uses your GPS location to provide you with helpful information about "places" around you. For example, it can show you not only the names and locations of restaurants that are nearby, but also user-generated reviews and ratings that you can use in choosing which one to visit.

5. Free anywhere instant multimedia messaging

It's for those who want to be connected with their friends anywhere, anytime. The simplest way to do it is with Meebo messenger mobile app, with which you log on to your multiple IM accounts, like Yahoo! Messenger, Gtalk, MSN, AOL, and others. Or, you can go by way of WhatsApp, which lets you send messages, photos, and videos across all mobile platforms (like Android, iOS, Blackberry, and Symbian) for free. Sending messages and files in itself is not much different from what you can do with Meebo and other messaging platforms, but the reason why my friends go crazy over this service, and what sets it apart from standard IM fare, is that it lets you form groups to which you can broadcast and from which you can receive all kinds of stuff. Believe me, it can get pretty crazy once the group messages and pics get started.

6. Mobile Internet browsing

One would think that smartphone browsing, with tiny 3- to 4-inch screen sizes, would be pretty cumbersome and eye-straining. But with many popular websites featuring mobile-friendly versions (ahem), and modern mobile browsers like Opera Mini, mobile Internet surfing has now become quite a pleasant experience.

7. Free applications

We have all heard Steve Jobs say "There's an app for that" to Apple's iPhone and iPad customers; fortunately for the budget conscious, increasingly the same can now be said of the Android mobile environment. And no, I'm not even talking about Angry Birds or Fruit Ninja, although those who are interested in these kinds of games would be easily satisfied by the diverse offerings at the Android Marketplace. Apart from the apps I already mentioned above, here are a few others that are fast becoming indispensable to me.

  • Mango. Access your favorite manga from the cloud.
  • Bloomberg. Check the status of your portfolio and your stock watch list anywhere you go (works with Philippine stocks, UITFs, and mutual funds).
  • Evernote. Write, store, and organize your notes on the fly.

Monday, April 25, 2011

Investing with US Dollars in the Philippines (Part 2: US Dollar Unit Investment Trust Funds)


In Part 1, we discussed how the investment decision of foreign-currency earners in the Philippines is greatly influenced by exchange rate expectations. In the case of US dollar earners, for example, if the peso is expected to strengthen further against the dollar, the best decision would be to convert USD income to peso and invest in peso-denominated funds; if, on the other hand, there is a prevailing belief that the peso will eventually devalue and make the dollar more expensive, then the best course of action would be to participate in US dollar-denominated investments and just liquidate when the exchange rate is at a favorable-enough level.

This post discusses the alternatives available to the investor who expects the peso to weaken against the dollar  in the foreseeable future and appropriately chooses to invest in USD-denominated investments.

US dollar investments in the Philippines

Unlike in more developed markets, Philippine investors don't have direct access to individual stocks listed in major foreign exchanges such as the ones in New York, London, and Hong Kong. The availability of foreign-denominated equity is thus just limited to investment funds like UITFs and mutual funds. Foreign currency-denominated fixed-income securities are more readily available to Philippine investors, with US dollar and Euro Republic of the Philippines (ROP) bonds and corporate bonds, although these usually require steep initial investments, somewhere close to 50,000 USD or EUR.

The best alternatives for foreign currency, particularly US dollar, investors in the Philippines are the dollar-denominated UITFs offered by most major banks. Dollar UITFs are more within the reach of retail investors, with a minimum initial investment of as low as 500 USD and feature all of the advantages of UITFs we have already discussed in previous posts. Below, we see a comparison of dollar UITFs offered by BDO and BPI in terms of various criteria. (Click on the fund names in the table to open the latest monthly report for these funds.)

Money market USD UITFs. These are made up mostly of short-term deposits, and Philippine and non-Philippine government securities. These are the safest (and lowest yielding) dollar UITFs in the market with almost-certain principal protection. (BPI does not offer this kind of dollar UITF)

Minimum Investment
2,000 USD
Minimum Additional
2,000 USD
Management/Trust Fee
0.50% per year
Early Redemption Fee
0.50% of original investment
Minimum Holding Period
45 days
Annualized Return*
3.26% per year

Bond USD UITFs. These are composed mostly of ROPs, corporate bonds, and international bonds. Since bond prices fluctuate with changes in interest rates, these investments are more volatile than money market dollar UITFs and thus pose a more significant risk of principal loss.

Minimum Investment
2,000 USD
2,000 USD
Minimum Additional
2,000 USD
2,000 USD
Management/Trust Fee
0.75% per year
1.00% per year
Early Redemption Fee
0.50% of original investment
1.00% of original investment
Minimum Holding Period
45 days
45 days
Annualized Return*

Minimum Investment
500 USD
500 USD
500 USD
Minimum Additional
200 USD
200 USD
200 USD
Management/Trust Fee
0.25% per year
1.00% per year
0.75% per year
Early Redemption Fee
0.25% of original investment
0.25% of original investment
0.25% of original investment
Minimum Holding Period
90 days
30 days
30 days
Annualized Return*

Equity USD UITFs. These funds are diversified across US, European, and other international stocks and equity funds. They are more volatile than bond dollar UITFs so the possibility of principal loss is greater, but they also provide a better chance of earning higher returns on any given period. (BDO does not offer this kind of dollar UITF)

Minimum Investment
500 USD
Minimum Additional
200 USD
Management/Trust Fee
1.50% per year
Early Redemption Fee
1.00% of original investment
Minimum Holding Period
90 days
Annualized Return*
0.37% per year

*"Annualized Return" = compounded annual growth rate of NAVPU in past 5 years

One thing that is obvious from the above comparisons is that this time, the choice is not as obvious as when we compared peso UITFs in a previous post. The most glaring difference between the dollar UITFs of BDO and BPI is that at a minimum investment of 500 USD and a minimum additional investment of 200 USD, BPI's UITFs are more affordable than BDO's. Nevertheless, I'll leave it up to you to scrutinize the details of the offerings and choose one or two that best fits your investment needs.

Thursday, April 21, 2011

3 Motives for Holding Cash According to John Maynard Keynes

STUFF I LEARNED FROM John Maynard Keynes's "The General Theory of Employment, Interest, and Money"

This post partly comes as a response to one of our readers' comments to the guide to newbie investors I posted a couple of weeks back:

Hi, I'm new. Is it ok if I skip a lil bit step 2? and start investing?


Normel is referring to the "Build up your emergency fund" step of the guide, and I'm pretty sure that his apprehension is shared by many investors, even some of the more seasoned ones: many investors are wary of the lost opportunity to earn returns from higher-yielding investments when a significant amount of cash (6 to 8 months worth of expenses as was mentioned in this post) is tied in idle (or virtually zero-interest) assets like bank accounts. In this post, I will discuss important reasons why it makes sense for us to pay this opportunity cost, using arguments presented by the celebrated economist John Maynard Keynes in his seminal work, The General Theory of Employment, Interest, and Money.

1. The transactions motive. "The need of cash for the current transaction of personal and business exchanges."

Keynes disaggregates this motive into two sub-classes, the income motive and the business motive, but the rationale is pretty much the same for both: often there is a considerable time interval between when cash is needed and when it is available, such as when there are delays in its disbursement, as in the case of wages for individuals (income motive) and revenues or payments for businesses (business motive). If the need to spend cash is immediate (as is almost always the case) and the delay is considerable, sufficient cash must be readily available to bridge the gap.

2. The precautionary motive. "The desire for security as to the future cash equivalent of a certain proportion of total resources."

This is where the "emergency" in "emergency fund" comes from: we need to hold a certain amount of cash for unforeseeable and unexpected expenses that are not (or cannot be) covered by standard risk management instruments like insurance. In my opinion, this is the most important reason for storing cash in liquid and safe assets, as I've seen real assets unnecessarily liquidated (at steep discounts) and small fortunes get wiped out in a small amount of time because of catastrophic financial emergencies.

Keynes points out that the strength of the above motives partly depends on the cheapness and

the reliability of methods of obtaining cash, when it is required, by some form of temporary borrowing, since holding idle cash won't be necessary if it can be obtained without difficulty at the moment when it is actually required. In real life, though, since these sources of "temporary borrowing" can smell desperate need from a mile away and raise interest to unreasonable levels accordingly, it often makes more sense to just hold a substantial amount of cash and just pay whatever opportunity costs you incur.

3. The speculative motive. "The object of securing profit from knowing better than the market what the future will bring forth."

In general, the importance of the first two motives is driven by the usual activity of the economic system; the speculative motive, on the other hand, is more a result of extraordinary economic circumstances like financial crises and bubble bursts that result in irrationally depressed asset prices and consequently, opportunities to earn abnormally high returns. Investors who had ample cash reserves during the 2008 financial crisis, and even at the height of the recent (and still on going) middle east unrest or the Japan disaster, could have taken advantage of depressed stock prices and made a considerable killing a reasonable amount of time after, provided they are able to keep their heads amid an environment of mob-market panic selling. If we look at how markets have recovered from these lows, it's easy to see how the cost of not having enough cash to take advantage of these circumstances could be very significant.

To end, these motives show us that there are tradeoffs involved in holding cash: while we lose the opportunity to earn (possibly) high returns from investing in risky assets like stocks and bonds, maintaining cash reserves also provides valuable benefits by protecting us from unpredictable, risky situations and giving us the capability to exploit rare opportunities to invest at a bargain. Hopefully, with these points it would be easier for investors to understand why it is important to first build an emergency fund before one invests in high-risk, high-return assets.

Monday, April 18, 2011

Investing with US Dollars in the Philippines (Part 1)


Dear Investor Juan,

I'm a 30 something software developer who has been blessed to work from home for over a year now. I'm currently earning around 2-3K dollars a month and with the dollar-peso exchange rate being not so good nowadays, what advice can you give to make our money work for us instead of the other way around?

I look forward to your posts in your awesome blog!


Dear WorkFromHomePinoy

The way I see it, investment decisions (how much to invest in which assets, when) of individuals (like yourself) and households (like OFW families in the Philippines) who receive wages or income denominated in US dollars or some other foreign currency, depend heavily on two things: your expectations of future exchange rates and the financial characteristics (like risk and expected return) of available foreign-denominated investments in the Philippines. Let us then use this simple framework to evaluate the alternatives available to you and come up with guidelines that can help you arrive at a more informed decision.

Exchange rate expectations

Since you earn in US dollars, you should first come up with a judgment or opinion about how exchange rates will behave in the foreseeable future before you come up with an investment strategy. In other words, you need to decide whether you believe the USD to PHP exchange rate will go up or go down, or more or less stay the same, within your investment horizon.

Average Monthly USD to PHP Exchange Rates

The exchange rate between the currencies of two countries is primarily determined by how these countries compare in terms of several factors, which include, among others: inflation, interest rates, trade surplus or deficit, debt exposure, political stability, and economic performance. Generally, a strong local currency (lower exchange rate vs. a foreign currency) is associated with a strong economy, just as when the peso appreciated to its highest level in seven years at 41.74 pesos to 1 USD in 2007, the same year the highest recorded GDP growth rate of 7% was posted in the period. Therefore, to have a rough estimate of how the peso will perform against the US dollar, say, in the next 5 years, gauging how well the economy will perform under the present administration versus the previous (or at least how the public and the international community will perceive this government will do), and how well the country's performance in the next 5 years will compare against the performance of the US in the same period, would be a good place to start. If you believe that the country will do just as well as in the past year, or even better, and that the US will continue to have problems, then the peso should strengthen even further (and make the USD cheaper), or at least stay at around the same level; of course, if you have a contrary opinion about the government and the economy's future performance, then it would make more sense to believe that the peso will eventually devalue.

How should these expectations affect your investment decision? If you believe the peso will remain at its current level or appreciate within the next five years, then  your best move would be to convert your investment capital to peso now and just invest in peso-denominated securities, some of which we have already discussed in previous posts like this one; if, on the other hand, you think the US dollar will eventually bounce back and that the peso will substantially weaken, then you should keep your investable funds in dollars and invest in dollar-denominated assets now, and just liquidate your investments and convert to peso when the exchange rate reaches a level that's to your liking.

In Part 2 we'll look at the commonly available US dollar-denominated investments in the Philippines and how these compare to their peso counterparts that we're more familiar with.

Thursday, April 14, 2011

7 Entrepreneurship Lessons from "Dilbert" Creator Scott Adams

You've seen his comics grace more than a few of my posts; we all know how, through Dilbert, he is able to show the sarcastic and idiotic -- but always funny -- sides of business and finance. However, from his recent article on The Wall Street Journal, we see that Scott Adams is so much more than the puns and wisecracks that he is well known for: his rigorous training in entrepreneurship and business management in college and graduate school, plus the fact that he has been able to find creative ways to practice what he has been taught even at a young age, makes Mr. Adams a very credible source of lessons about learning and doing business.

1. Combine skills

'The first thing you should learn in a course on entrepreneurship is how to make yourself valuable. It's unlikely that any average student can develop a world-class skill in one particular area. But it's easy to learn how to do several different things fairly well. I succeeded as a cartoonist with negligible art talent, some basic writing skills, an ordinary sense of humor and a bit of experience in the business world. The "Dilbert" comic is a combination of all four skills. The world has plenty of better artists, smarter writers, funnier humorists and more experienced business people. The rare part is that each of those modest skills is collected in one person. That's how value is created.'

2. Fail forward

'If you're taking risks, and you probably should, you can find yourself failing 90% of the time. The trick is to get paid while you're doing the failing and to use the experience to gain skills that will be useful later. I failed at my first career in banking. I failed at my second career with the phone company. But you'd be surprised at how many of the skills I learned in those careers can be applied to almost any field, including cartooning. Students should be taught that failure is a process, not an obstacle.'

3. Find the action

'In my senior year of college I asked my adviser how I should pursue my goal of being a banker. He told me to figure out where the most innovation in banking was happening and to move there. And so I did. Banking didn't work out for me, but the advice still holds: Move to where the action is. Distance is your enemy.'

4. Attract luck

'You can't manage luck directly, but you can manage your career in a way that makes it easier for luck to find you. To succeed, first you must do something. And if that doesn't work, which can be 90% of the time, do something else. Luck finds the doers. Readers of [The Wall Street Journal] will find this point obvious. It's not obvious to a teenager.'

5. Conquer fear 

'I took classes in public speaking in college and a few more during my corporate days. That training was marginally useful for learning how to mask nervousness in public. Then I took the Dale Carnegie course. It was life-changing. The Dale Carnegie method ignores speaking technique entirely and trains you instead to enjoy the experience of speaking to a crowd. Once you become relaxed in front of people, technique comes automatically. Over the years, I've given speeches to hundreds of audiences and enjoyed every minute on stage. But this isn't a plug for Dale Carnegie. The point is that people can be trained to replace fear and shyness with enthusiasm. Every entrepreneur can use that skill.'

6. Write simply 

'I took a two-day class in business writing that taught me how to write direct sentences and to avoid extra words. Simplicity makes ideas powerful. Want examples? Read anything by Steve Jobs or Warren Buffett.'

7. Learn persuasion 

'Students of entrepreneurship should learn the art of persuasion in all its forms, including psychology, sales, marketing, negotiating, statistics and even design. Usually those skills are sprinkled across several disciplines. For entrepreneurs, it makes sense to teach them as a package.'

Monday, April 11, 2011

4 Important Benefits of Banco de Oro's Easy Investment Plan


Dear Investor Juan,

I just want to know your opinion and views on BDO's Easy Investment Plan.

By the way, awesome blog!

Clark Kent

I kid. I kid.

Dear Clark, er, Vergel,

BDO's Easy Investment Plan (EIP) is an alternative way of investing in UITFs that offers several advantages over conventional lump-sum investments. It doesn't really involve anything newfangled or complicated, and other banks should offer the same option to their trust clients, if they don't already: by opting into the service, an investor gets to automatically transfer a fixed amount from his bank account, once or twice a month, into a BDO UITF of his own choosing. Here are some ways EIP can work to your advantage:

1. Prioritize savings

Perhaps the biggest challenge we face in building our emergency fund and investment portfolio is self-control. Midnight sales in malls on paydays reflect how conspicuous consumption has started to pervade our culture and psyche: every 15 days we feel we deserve to spend a bit more than we normally do for working very hard in the previous couple of weeks. This preference for short-term gratification over financial stability in the long run has led to very low savings rates among many Filipinos, a deficiency whose pitfalls unfortunately only become apparent after the fact, often when it's already too late. EIP helps you better avoid the temptations of overspending by automatically deducting a predetermined amount for investment, leaving you with less funds available for expenses. The good thing about this is that since you'd be investing in UITFs, which are liquid to a certain degree, you would still have access to your invested funds even during financial emergencies.

2. Face less hassle and stress

You enroll once, and that's it: your chosen amount will be invested for you automatically, unlike making periodic investments on your own where each instance entails going to the bank and filling out forms. Also, regardless of your investment horizon, you needn't worry about market timing and daily fluctuations in NAVPU (see item 4 below), which basically protects you from the stress and anxiety typically associated with investment decision making and monitoring.

3. Invest less than the minimum required

The trouble with UITFs is that the minimum additional investment is usually prohibitively high, at 10,000 pesos or more. For most people, setting aside 10,000 for investment would take more than a couple of months, which basically eliminates the opportunity to earn returns on what could be invested earlier. With the EIP, investors can invest amounts as low as 1,000 pesos per month, allowing them to benefit from time value of money by investing early and to build up their investments slowly but surely.

4. Benefit from cost averaging

"Cost averaging" is the conventionally used term for the investment strategy that EIP is based on; as was already described above, it involves investing a fixed amount regularly over a period of time into a particular investment instrument. If this were a perfect world and we have costless access to perfect information, then the best investment strategy would be to only invest when prices are at their lowest; unfortunately, the world is far from perfect and timing investments in risky securities, like bonds, stocks, and even UITFs, is essentially an exercise in futility. By spreading your investable funds evenly across your investment horizon, as you would with EIP, you are betting that you would be buying when prices are low about as often as you would be when prices are high, which averages the unit cost of your investment (your "buying" NAVPU, in this case) and gives you a better chance to earn higher returns.

Overall, the EIP provides several valuable benefits in exchange for very little costs (like having less spending money), so it's as close to a free lunch as we could ever get in the wonderful world of investing. It's the perfect investment scheme for intermediate investors, particularly those who are entering the systematic stage of investing, and for those who don't want to delve into the pseudo-science of market timing.

UPDATE 24 APR 2011:

BPI has a similar investment scheme called Regular Subscription Plan. An initial deposit of 10,000 pesos is required, and periodic increments of as low as 1,000 pesos per month or per quarter can be invested to the BPI UITF of your choice. Thanks to Anonymous for the heads up.

Disclosure: Again, while this post looks like some sort of infomercial for BDO, it is not: it is a plain and honest response to an actual query from one of our readers. I am not in any way connected with BDO or its affiliates. If you are aware of any similar products offered by other banks, kindly inform me so I can update this post accordingly. Thanks!

Thursday, April 7, 2011

Making Sense of the PLDT - Digitel - JG Summit Deal (Part 2)

In Part 1, we looked at the assets that PLDT is bound to get from the deal. Let's start Part 2 by estimating how much these assets worth to the telco giant. Please refer to this Excel file for the discussion below.

First let's take a look at the following assumptions.

For conservatism, we use stock price highs for both Digitel and PLDT in the past couple of weeks. The post-conversion stock price for Digitel assumes PLDT will convert all of the bonds into shares, while the "after new stock issue" price for PLDT reflects the new issues that are part of the stock-swap transaction.

We value the JG Summit advances at face, based on the figure quoted in the press release (note the slight discrepancy with the figure in Digitel's latest quarterly report). Then, we disaggregate the zero coupon convertible bonds into a straight zero coupon bond and the embedded option to convert the bonds into Digitel stock (also called a warrant): the zero coupon bond we value at face, or 18.6 billion pesos according to the press release; the warrant is already "in the money" since the strike price (the rate at which the option holder can convert the bonds, 1 peso in this case) is less than the value of the stock (1.21, see formulas for details), the option should be worth at least the savings it provides the option holder. We value the Digitel stocks outstanding at the high of 1.83. Based on these arguments, the assets should be worth around 62.62 billion pesos to PLDT.

Based on the quoted offer value of 69.20 billion, the deal presents a premium of 10.5% to the seller, JG Summit, as should be the case in such transactions. However, if we delve deeper and consider that this is not a cash transaction but rather a share-swap deal, based on the rate of 2,500 pesos per new PLDT share issued, JG Summit is actually getting less, around 8.23%, than the worth of the assets it offers. Based on this simple analysis, it seems that PLDT is indeed getting the better end of this deal.

What's in it for Digitel?

While there has been no explicit offer price quoted for the outstanding Digitel shares purchased by PLDT, many analysts would come up with an indicative offer based on the assumption that PLDT will convert the bonds in full, and some of the details provided in the press release.

The result is the 1.60 per share quote which is the basis of the tender offer under consideration for the remaining Digitel shares held by minority shareholders. This figure also seems to be the reason why Digitel's stock remains pegged slightly under 1.60 since the deal was announced.

This implied offer price is based on the press release detail that the zero coupon convertible bonds may be converted into 18.6 billion Digitel shares; at a conversion rate of 1 peso bond face value to 1 share, it implies that the bonds will have a face value of 18.6 billion when the deal is consummated on June 30, 2011. However, if you look closely at the features of the bonds detailed in the quarterly report, you'll find that the face value is nowhere near 18.6 billion; my own estimate reveals something closer to 17.2 billion pesos. If you replace 18.6 by 17.2 billion in the Excel file, you'll see that the indicative offer should be 1.71, or around 7% higher that the quoted 1.60 price. If this analysis is accurate, minority stockholders should reject the 1.60 tender offer since PLDT has been willing to pay JG Summit substantially more than that for the latter's shares.

In the long run, there should be less ambiguity regarding the prospects of Digitel. Sun Cellular is in better hands with PLDT, and Digitel shareholders and Sun subscribers should benefit from that advantage. At the very least, Sun subscribers should be able to access Smart's wider network coverage, if we accept PLDT's pronouncement, at no additional cost. Better quality service at the same unlimited pricing scheme should attract more customers into the fold and improve the firm's profitability. 

What about Globe?

Since the announcement of the deal, many were surprised at how Globe's stock price soared. Observers justify this behavior by pointing out that one less competitor in the industry benefits all the players, including Globe, an argument to which I vehemently disagree. Far from removing Sun as a contender in the mobile telco space, the deal actually strengthens its position. With Sun under its belt, PLDT will now dominate the high-quality and low-price segments of the market, putting additional pressure on Globe to find other ways to compete by changing its mobile strategy drastically. Finally, if PLDT imposes a discriminatory pricing scheme by offering lower rates within its network (Smart/TNT/Red/Sun), that will be the beginning of the end of Globe.

What about the Rest of Us?

If PLDT does maintain the pricing scheme of Sun, we'll all be better off with it: again, better service at the same low price is good for consumers. Some of my friends even dare dream of unlimited Sun-to-Smart calls. Better Sun service at low unlimited rates may actually push consumers to stick to just one phone line: guess which one they'll decide to drop?

Monday, April 4, 2011

Price Tag (The Price of Happiness Redux)

For those who have been waiting for Part 2 of the PLDT - Digitel - JG Summit article, you would have to wait a few more days. I think we've all received a large, unhealthy serving of telco goodness over the past couple of weeks, so now's a good time to give that topic a much-needed few-days rest. Don't worry, in all likelihood, Digitel's stock price will remain just a whisker under 1.60 the rest of the week, or until more significant developments unfold.

On an unrelated note, I'm sure by now you have already seen this video; and if the ratings are any indication, you most probably hate it, hate her, and have already lost all hope for her generation. Still, you watch it over and over again, dumbfoundedly amazed at how the video has managed to rack up millions and millions of views week after week after week.

If you've already gotten tired of that (as you should already have, jeesh), here's something that should be a welcome relief, and a source of renewed hope for the young 'uns.

The singer in this video, Maddi Jane, just covers the song, but her version is far better than the original (I've seen it, and it's so bad I wouldn't even bother you with the link). So let's all just imagine that the song is hers and that we're all learning a bit of life-wisdom from this very talented 11-year old.

Yes, more than being a billionaire or a rock star, life is about the things money can't buy, trite as that may sound. For example, I realized just now how much I value friendship and loyalty, and how hard it is to find people you can rely on to always have your back (and not stab it) since, almost always, they will disappoint you in the end. I mean, if you can't trust people you've known, people you've been close friends with, for more than a decade, who can you trust?

Eventually, you would just have to look for the things you value in other people, in those who would greatly value what you have to offer, in turn. Starting over is definitely bittersweet: on a certain level, it's sad to have to see things end, but in a sense it's also good to have it happen while there's still time to make up for whatever's lost.

Yes, that young lady is right. It's not about the money, it's all about wanting to make the world dance. 

Friday, April 1, 2011

Making Sense of the PLDT - Digitel - JG Summit Deal (Part 1)

This past week, we've witnessed a confluence of events that may have profound effects on our lives as both investors and consumers. What started out as a rumor last week was promptly verified only a few days later: PLDT, parent company of number one mobile company, Smart, entered a deal for a controlling stake in Digitel, operator of strong-third mobile player, Sun. The move has raised more than a few questions about how the competitive landscape of the mobile telecommunications industry will be affected, and what it all means for investors and the general public, alike.

This post aims to answer some of these questions by taking a closer look at the PLDT - Digitel - JG Summit "megadeal."

The Deal

Based on the official press release of PLDT, the telco giant will receive the following assets from JG Summit:
  1. 3,277,135,882 common shares in Digitel, representing a 51.55% equity stake
  2. Zero-coupon convertible bonds issued by Digitel and its subsidiaries to the JG Summit Group which are assumed to be convertible into approximately 18.6 billion shares of Digitel by 30 June 2011
  3. Intercompany advances of 34.1 billion pesos made by the JG Summit Group and certain of such parties to Digitel and its subsidiaries
PLDT agrees to pay for these assets, priced at 69.2 billion pesos, with new PLDT shares at a conversion rate of 2,500 pesos worth of assets to 1 new PLDT share.

Just by looking at these details, a typical investor would not be able to readily answer questions that are relevant to him (like how much is PLDT paying for each share of Digitel, or how much premium JG Summit will receive from the sale?). This is what I meant when I said the involved parties have not been sufficiently forthcoming with the details of the deal, and overseeing bodies have not been able to exert enough muscle to ensure the required transparency.

However, as it turns out, most of the information we need to answer these questions are actually available, although we do have to dig a bit deeper. For many of the items in the discussion below, you would have to refer to Digitel's latest quarterly report for September 2010 found here.

While one aspect of the equity portion of the deal (item 1 above) is straightforward enough (51.55% of Digitel owned by JG Summit), what's missing is how much PLDT values this stake (how much it is worth to the firm) and how much PLDT is willing to pay for it. In similar deals in more developed markets with stricter regulatory requirements, like say, in the US, this piece of information, the offer price, is readily provided to the general public. This piece of information is important to all investors because it doesn't only affect the shares sold by Party A to Buyer X, but also the value of shares held by other parties B, C, D, etc. even if they are not directly involved in the transaction. By packaging this deal as a basket of assets with one price, outsiders are not able to attribute implied premiums to any one component asset.

The second asset (item 2 above) are zero-coupon convertible bonds previously issued by Digitel and owned by parent company JG Summit. We know what bonds are, but what the hell are "zero-coupon convertible bonds"? "Zero-coupon" means just that, issuers are not required to pay periodic interest or coupon payments and holders earn exclusively from capital gains. In this case, the issuer, Digitel, receives a certain amount from the bondholder, JG Summit; Digitel is then obliged to pay JG Summit a significantly higher amount when the bonds are redeemed at some later date, up to when the bonds mature. If you take a look at Digitel's 3rd Quarter Report, you'll find this item on the firm's balance sheet (page 17) as "bonds payable" worth 15.8 billion pesos on September 2010; details of the bonds may be found in Note 13 (pages 52 to 53). According to PLDT, these bonds would have a face value of 18.6 billion on June 30, 2011, although based on my estimate, it should just be 17.2 billion pesos. This discrepancy will prove very significant in assessing the value of the transaction to all parties involved, which I will discuss in the next part of this post.

Another possible source of confusion for less experienced investors would be the convertible feature of the bonds. These convertible bonds give bondholders (now exclusively PLDT) the right, but not the obligation, to exchange the bonds for shares of the issuer, Digitel, at a specified rate, in this case 1 new share of Digitel for every 1 peso of face value of the bond. This option, in itself, is a valuable asset since it allows the holder to acquire Digitel shares at a much lower price than what is dictated by the market. One way to estimate the value of this asset would be to determine how much it will save the bondholder if it exercises its right to convert the bonds. When the bondholder converts the bond (since in this case, PLDT most certainly will), the ownership of all shareholders prior to conversion will be diluted by the newly issued shares, and the total value of shareholdings prior to conversion may change depending on price paid for the option.

Finally, the deal includes advances made by JG Summit to Digitel worth 34.1 billion pesos (item 3). This is Digitel's liability (and JG Summit's asset) which you'll find, again, on the firm's September 2010 balance sheet as a noncurrent liability "due to related parties" worth 34.29 billion pesos. Details could be found in Note 17 on page 55.

Now that we better understand the assets involved in the transaction, we are in a better position to answer some of the questions we posed at the beginning of this post. Unfortunately, this has gotten too long so soon, so I would have to continue the analysis in Part 2, where we'll look at who ends up with how much, and possible implications to your stock investment strategy and cellphone bill.

Have a great weekend everyone. :)

Click here for Part 2.
Related Posts Plugin for WordPress, Blogger...