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?

Related Posts Plugin for WordPress, Blogger...