Investors worried over FPC’s strategic direction

Investors have raised long-term concerns as to the uncertainty of Hong Kong-based First Pacific Co. Ltd. (FPC)’s strategic direction, following the proposed disposal of two of its largest investments in the region – the Philippine Long Distance Telephone Co. (PLDT) and Bonifacio Land Corp. (BLC).

In an analysis of FPC’s performance, international financial powerhouse Goldman Sachs noted that First Pacific’s strategic direction is highly uncertain and that the market is likely to view the company more as a pure investment holding conglomerate.

FPC entered into an agreement last June 4 involving its injection of its 24.4 percent controlling stake in PLDT and 50.4 percent interest in BLC into a joint venture company that will be two-third owned by the Gokongwei group and one-thirds by FPC. The transaction has been valued at more than $900 million for PLDT alone, with the Gokongweis expected to be pay over a three-year period the amount of $616.6 million.

The joint venture will also pay FPC more than $100 million and assume the loan extended by FPC subsidiary Larouge to Metro Pacific Corp. secured by 50.4 percent of BLC’s stocks.

Right now, FPC has three main assets in Southeast Asia: PLDT, Metro Pacific Corp. (MPC) which has a controlling interest in BLC, and Indofood in Indonesia.

But once the transaction is completed, the Hongkong conglomerate will effectively cede control in PLDT and BLC and will be a minority shareholder in these two assets with eight percent and 35 percent, respectively, Goldman Sachs in its Global Equity Research noted. At Indofood, FPC will continue to have a 48 percent shareholding.

Goldman Sachs said that while FPC still has a 49 percent shareholding in Escotel, its Indian wireless operations, this asset is unlikely to remain in the group for any meaningful time horizon given that FPC has already formally appointed financial advisors to review strategic alternatives for Escotel. "We believe disposal is the most likely outcome of this review," it said.

With this post-disposal asset portfolio, the research firm said the market is likely to view FPC more as a pure investment holding company.

It added that the market will be unable to identify any potential alternative drivers of long-term value creation for FPC, especially since its management, in an earlier statement, revealed that there were no specific near-term acquisition plans to deploy the $722 million cash proceeds which FPC will receive from the Gokongwei group over a three-year period.

"Until such time as FPC manages to deploy a substantial portion of the disposal proceeds in a major investment that has visible long-term value creation prospects, we believe the market will view FPC primarily as a pure investment holding conglomerate," it said.

And given that memories of FPC’s difficulties with its Southeast Asia investments are still fresh in investors‚ minds, Goldman Sachs noted that the market is likely to be skeptical of FPC’s ability to create meaningful long-term value with the $722 million cash proceeds from its Philippine asset disposals.

Preliminary indications from FPC management following the transaction announcement imply that the proceeds are unlikely to be reinvested in the Philippines and Indonesia and are more likely to be deployed in cash-generative consumer-related businesses located outside Southeast Asia. "Notably, management indicated the telecoms sector is unlikely to be a destination for the cash due to significant upfront capital expenditure and long payback periods typically associated with new telecoms investments," it said in its report.

Goldman Sachs also noted that the uncertain position of Manuel Pangilinan in the FPC group is likely to exacerbate market concerns over the company’s long-term strategic direction since Pangilinan has been the key architect, alongside the Salim family, of FPC’s growth and development since the company’s founding in 1981.

Pangilinan, currently FPC executive chairman and concurrent president of PLDT, has reportedly earned the ire of Salim and other FPC top executives when he opposed the group’s decision to sell its stake in PLDT and BLC.