Meralco’s SPNEC purchase actually a convertible loan

Meralco [MER 406.00, up 0.8%; 54% avgVol] [link] clarified reporting yesterday that it had purchased an additional 11.6% stake in SP New Energy [SPNEC 1.30, up 0.8%; 277% avgVol] from Leandro Leviste’s Solar Philippines (SPPPH) for P7.5 billion. In its note, MER said that it actually “extended a one year loan of P6.7 Billion exchangeable into 5.8 Billion SPNEC shares at maturity”. Later on, SPNEC was asked to clarify some points of the deal by the exchange, which it did in a reply that revealed: (1) the maturity date of the loan is September 2, 2025; (2) SPPPH will pay interest of 12% per year, with the ~5.8 billion SPNEC shares pledged as a security interest on the loan; (3) the ~5.8 billion shares are secondary shares (from SPPPH); and (4) there is an additional P0.8 billion tranche of the loan that is “subject to certain conditions.” 
 

MB bottom:  MER didn’t buy an 11.6% stake in SPNEC to take a majority position. That means everything that I said yesterday about MER being able to incorporate SPNEC’s financials into its own financial statements is inaccurate. Ok, but what does this all mean right now? Well, it means that Mr. Leviste has at least P6.7 billion in cash that he can use for whatever he wants. Will he continue playing with Roxas and Company [RCI 3.32, up 7.1%; 125% avgVol], or with his other toy, ABS-CBN [ABS 4.95, up 1.0%; 2% avgVol]? Will he use the money to refinance debt at SPPPH? Or maybe he’ll use it to buy a yacht. We don’t really know. The convertible loan also gives MER a path to majority ownership. Neither clarification (MER nor SPNEC) indicated which party held the right of conversion. If it’s up to Mr. Leviste whether he repays the loan with cash or shares at maturity, then MER at least has a decent shot of taking shares if Mr. Leviste’s inspiration for signing this deal is to plow the capital directly into some other company like ROX or ABS. If it’s up to MER whether it receives repayment in cash or shares, then this loan will operate like an options contract, giving MER the right (but not the obligation) to convert the loan to SPNEC shares at a price of ~P1.16/share. What’s up with that extra P0.8 billion loan, though? The parties didn’t say if it was secured and convertible in the same way. 

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