Globe Telecom, Inc. – Lopez Holdings Corporation

Globe Telecom, Inc. (PSE: GLO) disclosed in November 6, 2012 their intention to acquire 100% of the $200 million  notes (Notes) of Bayan Telecommunications, Inc (BTI) and BTI’s wholly owned subsidiary, Radio Communications of the Philippines, Inc. (RCPI) for $280~$310 for every $1,000 on or before 5:00 PM, New York City time,  November 19, 2012. [1]

The consideration that GLO will pay depends on the acceptance level:

  1. $280, if the acceptance level is less than 75%
  2. $290, if the acceptance level is greater than 75% but less than 80%
  3. $300, is the acceptance level is equal to or greater than 80% but less than 85%
  4. $310, if the acceptance level is equal to or greater than 85%

The tender offer shall be valid if at least 70% of the remaining principal amount of the Notes is tendered and 70% of the principal amount of RCPI debt is tendered. As of the date of the disclosure, approximately 45.4% of the Notes and 79.1% of RCPI debt already agreed to tender their claims.

Assuming that conditions for a valid tender offer are met and GLO is able to pay the highest consideration for the debt, GLO will pay a total of P2.6 billion @ P42/$ exchange rate. [2] GLO’s intention to be the largest creditor signals their intent to acquire BTI.

A Scenario Where GLO Will Buy BTI

Currently Philippine Long Distance Telephone Company (PSE: TEL) is trading at 3.60x price to revenue per share multiple. BTI has revenue of 4.7 billion as of 2011. Assuming the same multiple as TEL, BTI’s fair value should be 17.64 billion (4.9 billion x 3.60x). BTI has a negative book value of 17 billion. Negative BV happens when liabilities exceeds total assets.

The effect of one time gain in a per share basis at a range of consideration is as follows:

LPZ’s fair value range assuming .55x price to book ratio multiple:

Comments:

I believe that GLO will eventually initiate an equity position in BTI. BTI has total long term debt of P14 billion but it is a company with 4 billion annual revenues and generates P2 billion cash from operations with minimal capital maintenance of 700 million. It has the majority interest (85%) in National Digital Transmission Network (NDTN) a major alternative communications backbone, the other being operated by TEL. A communications backbone is a larger transmission line that carries data gathered from smaller lines. NDTN stretches from Santiago City, Cagayan Valley to Davao City passing through Cebu City and Cagayan de Oro City.

 Risk:

November 19, 2012, New York Time, is a crucial date. Should the tendered claims be less than 70%. The tender offer will not be valid and would render all the assumptions above unlikely in the short-term.

Source/notes:

  1. Press release: “Globe Launches Tender Offer for All Outstanding 13.5% Senior Notes Originally Due 2006 Issued by Bayan Telecommunications, Inc.”, http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-7966_GLO.pdf
  2. Cash GLO may pay for the BTI’s financial obligation:
  3. PSE disclosure on Bayantel’s NDTN expansion, http://lopez-holdings.ph/~lholding/uploads/files/Blurb-62_File-98_BPCinforeBayanTelNDTNExpansion-3ProjectJan232007.pdf

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.

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