Ayala Group mulls investments in power sector

Ayala Corp., one of the country’s largest conglomerates, is eyeing entry into the power business through the possible acquisition of National Power Corp. (Napocor) assets slated for privatization.

"The government is quite interested in getting private capital in the sector," said Ayala Corp. head Jaime Augusto Zobel de Ayala II in an interview. "We are watching to see what would make sense for us."

The 46-year-old Harvard-trained economist, whose family controls Ayala Corp., succeeded his father at the company’s helm in 1995. Together with younger brother Fernando, co-vice chairman at Ayala, Zobel turned around telecommunications unit Globe Telecom, making the joint venture with Singapore Telecommunications Ltd. more profitable than Philippine Long Distance Telephone Co. in three of the last five years.

Zobel also started Manila Water in 1997. The unit, which held an initial public offering in March, is the nation’s most profitable water utility.

"Ayala has emerged as a strong player in the industries it chose to enter," said Allan Yu, who helps manage $2.8 billion at Metropolitan Bank & Trust Co., the largest Philippine lender by assets. "It carefully studies its ventures, allowing them to succeed where others fare badly."

Ayala and three of its units account for 32 percent of the Philippine Stock Exchange Composite Index, a basket of 30 companies that serves as the national equity benchmark.

Ayala also owns Bank of the Philippine Islands and Ayala Land Inc., the chief assets of the Zobels, whose wealth is estimated by Forbes at $1.5 billion.

In 2002, Ayala Land secured its position as the country’s leading property developer with the purchase of Fort Bonifacio, the former Army camp, adjacent to Ayala Center, the nation’s main financial district.

Established as Casa Roxas in 1834, the company benefited as Spain opened its former colony to trade. From manufacturing, mining, agriculture and trading, the Zobel family expanded into distilling, hotels, transportation, insurance and steel.

"Ayala has a good history of building businesses," said Rico Gomez, who helps manage $1 billion at Rizal Commercial Banking Corp. in Manila. "They also have a reputation of taking care of their shareholders."

Zobel, whose partners include Mitsubishi Corp. and United Utilities Plc., may now turn Ayala’s attention and resources to the power industry.

The group, however, would be competing for power assets including the 41 plants and national electricity grid the government is selling to trim P3.87 trillion ($70 billion) of debt.

Zobel’s interest in the power sector has remained firm despite recent news that the nation’s largest power retailer Manila Electric Co. forecast a third year of losses and the sale of a power plant canceled because of a lack of guaranteed customers.

Four years since lawmakers allowed the government to offload power assets, it has sold just six power plants, or about 11 percent of total capacity, raising $567 million.

The auction of the 600-megawatt coal-fired Calaca thermal plant was scrapped last June 28 after two of the three bidders bowed out because the plant doesn’t have a supply contract. The new auction for Calaca is on September, following the bidding for other plants in August.

The sale of state transmission wires was also canceled at least twice because investors were concerned about courts overturning power price increases and potential political instability. The government wants to sell the grid later this year, after missing a June deadline.

Meralco said it may post a loss if sales don’t improve and because of provisions for a potential refund of a tariff increase.

In Nov. 2002, Zobel said he wasn’t interested in buying power plants or transmission lines. This month though, Zobel said the company now has the capacity to enter a new industry.

"They have the track record and financial muscle to succeed," said Jun Mendoza, who helps manage about $1.3 billion at Banco de Oro. "What it lacks in knowledge, Ayala makes up by attracting the right partners."

The Philippines needs about P400 billion in the next 10 years to expand supply, according to a government study. It must add 6,000 megawatts by 2015 to prevent power shortages from occurring as early as 2008.

As much as $3 billion must be invested to increase capacity in the next five years, according to First Philippine Holdings Corp., owner of the nation’s third-largest power producer and its largest electricity retailer.

"The energy sector will require huge investment and the government expects the private sector to fill this need,’’ said Elpidio Ibanez, president at First Philippine Holdings.

Allegations that President Arroyo rigged last year’s elections and that her family accepted protection money from illegal gambling may hobble the government’s plans to sell power assets, said analyst Alex Pomento.

"There is a lot of anxiety now,’’ said Pomento, head of research at Macquarie Securities Asia. "Investors are waiting to see how political events pan out."

Because it is a monopoly, the power grid, valued at $2 billion by the government, may be the most attractive of the assets. National Transmission Corp. had a P15.4 billion profit in 2003. Plant operators, including Atlanta-based Mirant Corp., whose local unit is the nation’s largest privately owned power producer, are barred from owning the grid.

Ayala’s market value has doubled since Zobel ruled out energy investments three years ago. Cash has tripled to P35 billion, while 2004 profit reached a record P7 billion.

That leaves the company well placed to consider new industries, said Zobel, whose past acquisitions include three banks.

"It is my job to loosen the reins when the right time comes," he said. "Perhaps this is the right time."