Two of the country's largest and richest companies in a one of the most strategic industries have just sealed the Philippines' largest buyout in Philippine corporate history. The price tag: P74.1 billion.
How PLDT will benefit from this swiftly executed deal is apparent: It solidifies its position as the dominant telecommunication player in a capital-intensive and highly competitive industry.
But what's in it for the Gokongwei family, Digitel's controlling shareholders?
Lance Gokongwei, the president and COO of Digitel's parent firm JG Summit Holdings, has said that they have been looking for a suitable partner for years. But she had shared that selling Digitel was a "very difficult decision."
Cashless transaction
The deal was structured this way: PLDT is buying 51.55% of Digitel and the latter's debts, including a bond convertible into Digitel shares, for P69.2 billion.
It is paying the transaction cost with new PLDT shares priced at P2,500 each, making the deal a share exchange.
In other words, the Gokongweis will not be laughing all the way to the bank at the close of this cashless transaction.
Some say cold cash is what the Gokongweis should have demanded for a business that successfully carved a niche in the market through its popular bucket-priced offerings.
After all, they invested at least P40 billion (P34 billlion in advances, P9 billion in equity) in Digitel since they acquired it in 1993 and launched in 2003. It has been operating at a loss for years, but posted a modest P851 million net income as of September 2010.
The deal will give Gokongwei a 12% stake, equivalent to one board seat, in PLDT.
One seat
There lies the rub. It wasn't long ago when John Gokongwei Jr., the family patriarch, launched an almost $1 billion-worth aggressive bid to gain a seat in PLDT in 2002.
But PLDT chair Manuel Pangilinan, who was then the president, was able to muster enough support from existing PLDT shareholders to block the elder Gokongwei's entry and keep his role as the goalkeeper of the company controlled by the Salim family of Indonesia.
At the time, PLDT has lost market share to Ayala-led Globe Telecoms and a merger with Digitel, then the number two landline operator, was seen as a positive influence to PLDT's financial future.
Nothing came out of that after PLDT management cited conflict of interest, and the lawmakers were wary of a dominant player in an industry that has already been liberalized.
Nine years after, the cast of characters are the same but the situation is different.
Smart Telecom, the mobile arm of PLDT, has made strategic moves -- focusing on the prepaid market, first to introduce over-the-airwaves credit loading, among others -- that allowed it to rake in billions of pesos in yearly profits, way more than Globe had been making.
Smart's success bankrolled efforts of the PLDT group to pursue a convergence strategy. The group has established presence in other businesses -- such as media, outsourcing, etc -- that helped the group transcend from just being a utility company involved in traditional telecommunication products, to one with a diversified portfolio of businesses.
But Digitel was a thorn on PLDT's side.
Digitel's Sun Cellular offered the lowest bucket plans in the country, effectively dampening margins of both the top 2 players -- PLDT and Globe. The 2 were forced to offer similar cheap services, too, when subscribers signed up for Sun deals in droves.
Smart subsidiary, Connectivity Unlimited Resource Enterprise, Inc. (CURE) started offering Red Mobile brand in 2008 to go head-to-head against Sun. This strategy didn't work. Red saw its prepaid subscriber base fall by 752,313 to reach 381,477 in September 2010.
Before the mega-deal between PLDT and Digitel, the latter has snatched from Globe the top post in the postpaid market.
Why then would the Gokongweis agree to one seat in PLDT after they have proven themselves as a formidable player in the industry?
PLDT's prospects
Analysts point to PLDT's rosy prospects -- and the Gokongwei's share in it.
They said Gokongwei's true gain now lies in its ownership of PLDT, whose valuation is seen to increase significantly following the Digitel buyout.
"We see a 300 to 500 basis point margin improvement at PLDT-Smart level," he said.
Sullivan also cited another important benefit from the acquisition: capital expenditure savings.
"Directionally, we're likely to see a reduction of capex at PLDT level. The capex savings is another key aspect to focus on because it will affect the free cash flow of PLDT moving forward."
Sullivan also debunked some claims that the PLDT-Digitel transaction is "expensive."
"Some people have suggested that this is a very expensive transaction for PLDT because of the implied value for Digitel. That's wrong."
He said that aside from improved margins, Digitel has become a "significantly more profitable" unit for PLDT.
"For Digitel, we will see immediate step change function in terms of the marketing structure of the company as it leverage a lot of PLDT's in-house systems. We'll also see a drastic reduction in interconnection payments paid by Digitel to PLDT on a consolidated basis. We see vastly improved margins for both companies moving forward."
Nearest competitor Globe Telecom, meanwhile, is not at all at the losing end, Sullivan said.
He noted Globe also stands to benefit from less competition.
"Globe is put in an interesting position. On one hand, the industry structure has become far more stable which is positive for industry participants. One can argue this is positive for Globe because they get the benefits of an improved industry structure without having to pay the price."
"The more interesting question is will we see significant changes in Globe's strategy. They have lost market share in the couple of years and now they're facing a PLDT, which is more dominant than perhaps it's ever been. The road ahead for Globe, I think is a bit difficult," Sullivan concluded.
