March 19, 2004

The PSE Private Placement

The PSE recently issued 5.26 million new shares or 40% of the bourse's unissued shares to five institutional investors: PLDT Beneficial Trust Fund, San Miguel Corp. Retirement Fund, the Government Service Insurance System, Kim Eng Investment Ltd. and KE Strategic Pte. Ltd.

The premise for the sale was the Security and Exchange Commission's (SEC) order for the PSE to sell more shares because brokers still held majority of the shares outstanding.

There were apparently several flaws. First of course is that the PSE sold the new shares P119.50 per share, translating to roughly about P730 million in proceeds. It's a good amount until we look at the shares' market value at the time of the sale, wherein the price hoevered from P190-P200.

Second is that the sale was reportedly done in haste. Whereas some stockholders were looking at a year horizon before deciding, the sale was executed almost immediately after it was contemplated.

Third was that the underwriter was ATR Kim Eng Capital Partners, which is conspicuously related to the buyers

Roxas also questioned the statement of the underwriter ATR Kim Eng Capital Partners which had pegged the price at a price-to-earnings ratio of 46 times the PSE’s projected 2004 earnings of R10 million.

For the valuation, it was determined that the selling price was at "48.6 times the prospective earnings per share of the PSE this year and a 10% premium over book value." The point was that at P119.50, PSE shares were already expensive.

Assuming that was the case, as an analyst I would recommend a 'sell' to holders at market. That's what happens in the market after all. Disposing shareholders sell down at market, but never below market. It even seems more scandalous considering that these are bulk shares. Remember that less shares such as in odd lots are sold at a discount; on the other hand, bulk shares, such as that made by SSS of its EBC shares, are done at a premium to market, regardless of valuation.

What would have been a better option? The PSE could have issued stock rights at the lower price. In such a case, existing shareholders would not have been prejudiced.

So the SEC ordered the sale? Let's compare this to other companies that should have sold shares to public. What happened to Smart, Calex or Shell? They all begged off apparently because of poor market conditions. Yet these are all required by law to list. It would be a stretch to believe that the PSE will not be allowed a similar concession.

As for the Kim Eng conflict of interest, let's just consult a CFA book on that.