The decision of the country’s sovereign wealth fund, the Maharlika Investment Corporation (MIC) to buy into the National Grid Corporation of the Philippines (NGCP) through the latter’s major shareholder Synergy Grid and Development Philippines (SGP) came days after NGCP was blamed by President Ferdinand Bongbong Marcos Jr. for the island-wide blackout that covered Western Visayas.

Echoing Marcos’ call for NGCP’s accountability, Speaker Martin Romualdez also openly called for MIC to get into NGCP. The company operates on a 25-year concession to manage the country’s sole power grid operator since 2007, the year it bagged the contract.

Now, the government through MIC owns a 20% stake in the only operator of the country’s power grid. The move is generally seen as a maiden major investment that seeks to tighten the government’s grip on a vital infrastructure where China’s State Grid Corp.’s fingers have been clearly dipped into with a 40% stake. 

Although 60% of NGCP is held through a common corporate structure of the two largest shareholders, tycoons Henry Sy Jr. and Roberto Coyiuto Jr., suspicions of China’s meddling in its operations persist.

The maiden MIC investment was made against the backdrop of escalating tensions between Manila and Beijing over territorial disputes in the West Philippine Sea. Also, NGCP, along with the State Grid Corporation of China, is at the center of a congressional probe over its conformity with franchise onuses and its controversial ownership.

President Marcos said the maiden investment “represents a vital opportunity for the government to regain greater influence over the nation’s critical power infrastructure to ensure that every Filipino has access to reliable and affordable power.” 

The deal allows MIC to subscribe to preferred shares into SGP which affords the wealth fund two seats each at NGCP and SGP.

Romualdez explained that MIC’s involvement could “be a significant step” toward improved efficiency, economic growth, enhanced energy security, support for renewable energy integration, and increased accountability in NGCP’s operations.

NGCP on the hot seat

The lively debate between nationalist elements in the Senate and apologists for Chinese investors has been ongoing in the past few years due to increased concern and criticism over NGCP’s operations.

In the Senate hearings about NGCP’s ownership, a proposal was put forth to stop it from passing on its franchise tax to consumers. There were long discussions, a healthy dose of dramatic pauses, and the requisite “fighting to make life easier for Filipino consumers” rhetoric.

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Energy Regulatory Commission (ERC) Chairperson Mona Dimalanta disclosed that the move would affect the public by reducing by “less than 1 centavo per kilowatt-hour (kWh)” or around 1- to 2-centavos each consumer’s actual electric bill.

Once uttered, these words should have caused disbelief, consternation, and anger among those in attendance. Were the those senators, top executives, resource persons, and legislative staff members in the session hall really wasting time and energy in finding a way to possibly save around 1% of our annual electricity bill? Add the combined man-hours of those in attendance to the actual cost (electricity, food and beverage, transportation, etc.) of the hearings, and let’s ask ourselves: is this how we want our lawmakers to use our taxes? Do we want them to conduct hearing after hearing, so that our monthly Meralco bill can go down from P3,000 to P2,999.98?

What I find most concerning is the virtual stranglehold that the Chinese had on our sensitive power sector. Until January 2009, the government-owned National Transmission Corporation or Transco was in charge of power transmission and distribution in the Philippines. With MIC’s investment in NGCP, it is hoped that we would be able to have an eye inside NGCP’s operations. 

Long overdue

Indeed, buying into NGCP should have been done by our government years ago. It has become even more urgent now that the Chinese are unrelenting in asserting ownership over the whole West Philippine Sea, under the so-called nine-dash line.

One thing is indisputable. The dominance that China’s State Grip exerts over NGCP is disproportionate to its 40% stake. It has veto power, for instance, over decisions reached by the majority. Clearly, the cards are stacked against the Philippines in more ways than one.

For one thing, all manuals and instructions are written in Kanji, the logographic Chinese characters adapted from the Chinese script used in the writing of Japanese. This is why NGCP depends on Chinese engineers and technicians in its day-to-day operations. By the way, the Chinese are paid a hundred times more than their Filipino counterparts.

As a public utility, NGCP’s mandate as transmission service provider is to operate, maintain, and develop our country’s power grid, an interconnected system that transmits gigawatts of safe, efficient, and affordable power to every Filipino. Unfortunately, the NGCP has failed to deliver on its vision and mission to contribute to Philippine social and economic progress by building the strongest power grid and maintaining the best power utility practice in Southeast Asia. It has not developed the infrastructure needed to connect the main grid to poorly served areas in the country. 

It is easy to see why NGCP keeps falling short of its promise. Year after year, a big chunk of its income goes to dividends, leaving precious little for development. In 2019, for instance, P15-billion of NGCP’s income of P20-billion was distributed to shareholders in the form of dividends. The most galling of all is how the NGCP declared dividends of P24-billion for itself in 2014, even though the corporation earned only P22-billion that year. In other words, NGCP investors should be given their pound of flesh, no matter what.

The national consensus is that allowing foreigners, especially Chinese, to own vital industries poses grave security risk to national security, something other countries will never countenance.

Details of the deal

Vantage Point, in collaboration with US-based fund manager Eric Jurado of the Institutional Investor, dug into the details of the deal. Here’s our math:

• SGP Deal with MIC. On January 31 this year,  SGP, together with its majority stockholders Henry T. Sy, Jr. and Robert G. Coyiuto, Jr., executed a binding term sheet with MIC for a significant equity investment in SGP. The agreement entails MIC subscribing to newly issued convertible preferred shares, which will ultimately give it a 20% stake in the company and the right to elect two out of nine board directors.

This investment will be subject to various conditions, including due diligence, execution of definitive agreements, corporate approvals, and compliance with regulatory requirements such as the Securities Regulation Code and the Philippine Stock Exchange rules.

• Investment Breakdown and Share Issuance. Before MIC’s investment, SGP had 5,265,866,000 common shares outstanding, valued at P60.56 billion, or P11.50 per share, as of January 31, 2025. MIC has agreed to subscribe to convertible preferred shares at P15.00 per share. 

To achieve its target 20% ownership in SGP, MIC will acquire 1,316,466,500 convertible preferred shares. This will bring the total number of shares (common + preferred) to 6,582,332,500.

• Convertible Preferred Shares and Dividend Yield. The convertible preferred shares will have a dividend yield of 6.5% over the next three years, post-investment. If MIC decides to convert their preferred shares to common shares, the dividend yield will increase to 8%. This structure provides MIC with a financial incentive while also allowing flexibility in future ownership decisions.

Based on the 6.5% dividend yield, MIC will earn PHP 1.28 billion per year from its investment of PHP 19.75 billion in convertible preferred shares. If MIC later converts these shares to common shares and the dividend yield increases to 8%, its annual earnings will rise to PHP1.58 billion.

• Projected return on investment. If SGP’s earnings continue to grow by its 5-year historic annual growth rate of 4.4% over the next five years and its convertible preferred shares maintain a dividend yield of 6.5%, then MIC can expect a return on its investment of 10.9% per year over the next three to five years (annual earnings growth + dividend yield). If MIC decides to convert its preferred shares to common shares, it can expect a higher return of 12.4% per year, factoring in the higher 8% dividend yield alongside projected earnings growth.

• Analyst expectations for SGP’s stock price. Analysts from Bank of America’s Global Research and J.P. Morgan have expressed bullish sentiments on SGP’s stock. They expect SGP’s common share price to rise by 30.4% to P15.00 within the next 12 months, matching the price of MIC’s convertible preferred shares. This projection reflects strong investor confidence in SGP’s future growth and financial stability following MIC’s investment.

• SGP’s valuation compared to industry peers. SGP is considered to have good value based on its Price-to-Earnings (P/E) Ratio of 6.3x, which is significantly lower than the Asian Electric Utilities Industry average of 14.8x (based on 13 comparable companies). This suggests that SGP is currently undervalued relative to its peers, making it an attractive investment opportunity.

• Financial health and debt concerns. While SGP’s historic annual operating cash flows have been sufficient to cover annual dividend payments, they have not been enough to cover their annual capital expenditure requirements, which have been larger than operating cash flow. This has resulted in a net debt to equity ratio (total debt – cash) rising to 125.3% as of September 30, 2024, a level considered high (above the 40% threshold). SGP’s debt is also not well covered by operating cash flow, with only 16% coverage, whereas a minimum of 20% coverage is generally preferred. These financial constraints highlight the importance of MIC’s investment in strengthening SGP’s capital position and long-term financial stability.

New ownership structure

After MIC’s investment, the equity distribution in SGP will be as follows: 

• Henry T. Sy, Jr.: 31.12%
• Robert G. Coyiuto, Jr.: 31.12%
• Maharlika Investment Corporation (MIC): 20%
• Other Shareholders: 17.76%

Previously, Sy and Coyiuto each held 38.9% of the company, but with the expanded share capital, their respective stakes have adjusted proportionally.

Financial implications and valuation

MIC’s investment injects PHP 19.75 billion into SGP, increasing the total company valuation post-investment to PHP 80.31 billion. Based on this, the ownership values are estimated as follows:

• Henry T. Sy, Jr.: PHP 24.99 billion
• Robert G. Coyiuto, Jr.: PHP 24.99 billion
• MIC: PHP 19.75 billion (based on its investment)

Potential risks and uncertainties

Are there any risks that the expected catalysts won’t play out as anticipated? Yes, several factors could prevent the projected stock price increase and return on investment from materializing. These include macroeconomic headwinds such as rising interest rates, inflation, or weaker-than-expected electricity demand, which could impact SGP’s revenue and profitability. Additionally, execution risks related to MIC’s investment, including delays in regulatory approvals or shareholder pushback, could alter expected outcomes.

Are there any regulatory or competitor risks that could change the outcomes? Regulatory risks remain a concern, as government policies and oversight over the National Grid Corporation of the Philippines (NGCP) could impact SGP’s earnings potential. Stricter regulations on energy tariffs or capital expenditure requirements might also strain financial performance. Furthermore, increasing competition from renewable energy providers and independent power producers could affect market positioning and revenue growth.

Strategic Significance. This transaction marks a significant development for SGP, strengthening its capital structure and potentially enhancing its influence over the NGCP, where it holds an indirect equity stake. The entry of MIC as a strategic investor is expected to bolster corporate governance, financial stability, and operational capabilities.

As the deal progresses, market observers must closely monitor through due diligence and regulatory approvals the impact that the Philippine government’s presence in SGP will have on the company’s financial standing and long-term strategic direction. It’s about time that true power is given to the Filipino people. – Rappler.com