Meralco’s Run Reflects On The Philippine Political Economy

``When the government, along with the pay-for-favors thieves in Congress and special interest power players, nationalizes and runs a business, decisions will always be made with political considerations/favors being first up on the agenda. Decisions will never be made on the basis of profit-and-loss and winning and retaining satisfied customers… Governments are not in the business of profit-and-loss; they are in the business of steal-and-spend.” Karen De Coster Politicians Act Surprised by Lack of "Business Criteria" for Decisions at New Government Motors

For those fixated with “prices driven by fundamentals”, they ought to explain to us in fundamental lingo why the sudden outperformance of Meralco, a Philippine electric utility company whose legislated monopoly covers the franchise of the national capital region of Metro Manila.

Meralco surged 23.45% over the week and is up by about 200% year to date. Of course, I’d like to congratulate those whom have been presently profiting from the recent activities.

To consider, given Friday’s close at Php 179 per share, this puts Meralco’s Price Earnings Multiple to high 68 (based on PSE calculations) or 32 (based on technistock). Price to Book is now 3.74 (technistock) and 3.73 (PSE) while dividend yield is .56% (technistock) and .3% (PSE). [Yes, as you probably noticed, financial fundamentals also come in diverse interpretation depending on the institution.]

Meralco hasn’t been driven by foreign investors as modest foreign selling has been accounted for during the past 4 weeks.

Has Meralco stuck gold as to merit its present price levels? Or has Metro Manila consumers suddenly been bequeathed with a windfall as to boost its electric consumption, thereby translating to bigger top line and also fatter bottom line?

The obvious answer is no.

If there has been a precipitate boom in electricity consumption then activities that underpin electricity usage such as TV programming could likewise be booming too and should be reflected in share prices of TV stations as GMA-7 or ABS CBN . Unfortunately both TV stations have been consolidating alongside the major indices [see figure 5]

Figure 5: PSE: Meralco and Sectoral Indices

Meralco (light green) which falls under the category of Commercial industrial (pink) both of which has seen outperformances relative to other sectoral indices [in pecking order] such as the Mining (green), All Index (Maroon), Holding (red), Properties (Blue) market laggards in Service (gray) and Bank (Black candle) index.

The reason I highlighted Meralco movements in March is to show that Meralco and the energy sector has led the general market’s rebound. Today’s sizzling performance could portent for a replay sometime in the near future.

Going back to the issue of fundamentals, the electric utility company projects a flat growth for 2009! So the present market activity is hardly about positive change in the traditional fundamental aspect.

And the only “fundamental” driver appears to be the transitioning of the ownership structure of the prized utility company.

In a word…POLITICS!!!

Meralco’s Possible Role In The Presidential Elections

The formerly Lopez dominated Meralco, whom has been associated with the political opposition, has been subjected to political harassment by the incumbent administration since last year.

The corporate struggle has drawn in an apparent ally of the administration in Danding Cojuangco owned San Miguel Corporation [SMC], who in a dramatic fashion overhauled its business model almost overnight by selling its beer business and has swiftly bought into Petron and Meralco, as previously discussed in Has San Miguel's Shifting Business Model Been Linked To The Philippine Presidential Elections? Lessons and San Miguel’s Shifting Business Model: Risks and Opportunity Costs.

The struggle over the company’s leadership seems to have diminished when a white knight in the Manny V. Pangilinan controlled Philippine Long Distance Telephone , the largest publicly listed company in the Philippines, came to the rescue of the Lopezes as discussed in King Kong Versus Godzilla at the PSE; Where Politics Trumps Markets and in Has Meralco’s Takeover Been A Good Sign?

Today, the acquisition process has apparently been unfinished, as PLDT through subsidiaries Metro Pacific [MPI] and Pilipino Telephone [PLTL] are said to be adding to the its holdings by acquiring through the open markets (Reuters).

Of course, we can’t discount that the other party SMC could also be behind the same activities in order to improve on their shareholdings for a potential showdown into next year’s annual stockholders meeting over management control.

In my view all of this is tied to the 2010 presidential elections.

The first scenario could be that the 2010 elections will possibly see an administration planted Trojan horse among the field of opposition candidates who will contend with the administration bet.

The winner of the 2010 elections will likely be covertly affiliated with either MVP’s TEL or Danding Cojuangco’s San Miguel Corp.

Here, depending on whose side the assuming President will be, the “opposing camps” will possibly sell their shares in blocks to the other party, where the Lopez camp could be eased out.

Or the other scenario could be that Meralco could be used as a vehicle to fund or finance an affiliate candidate of the new Meralco owners in next year’s election.

Joe Studwell in his book Asian Godfather: Money and Power in Hong Kong and Southeast Asia aptly describes how the ASEAN political economy operates,

``Centralized governments that under-regulate competition (in the sense of failing to ensure its presence) and over-regulate market access (through restrictive licensing and non-competitive tendering) guarantee that merchant capitalists-or asset trader, to use a more pejorative term-will rise to the top by arbitraging economic inefficiencies created by politicians. The trend is reinforced in South-east Asia by the widespread presence of what could be called as ‘manipulated democracy’, either in the guise of predetermined winner democracy (Singapore, Malaysia, Suharto’s Indonesia) or else in the scenario where business interest gain so close a control of the political system that they are unaffected by the changes of government that do occur (as in Thailand and the Philippines). In both instances politicians spend huge sums to maintain a grip on power that has some semblance of legitimacy. This can only be financed by through direct political ownership of big business or more usually, contributions from nominally independent big business that is beholden to politicians. Whichever, the mechanism creates a not entirely unhappy dependence of elites between politicians and tycoons.” (bold highlights mine)

At the end of the day Meralco will ultimately serve as a trophy for the winner of the political crony capitalist football.

As you can see, the nations’ political structure shapes the local economy. Hence, it would be a reductionist fallacy to presume markets operate evenly everywhere or that traditional fundamental metrics apply straightforwardly to disparately constructed political economy. Again operating reality and mainstream expectations don’t match.

Again Joe Studwell describes how wealth is generated in Southeast Asia and the function of the tycoon class to the economy,

``The tycoon class served its political purpose, and generated enormous personal wealth, but did little to promote overall economic growth. Instead growth came from a combination of small scale entrepreneurs, many concentrated in and around manufacturing, and a policy of renting out the local labour force to efficient multinational exporters.” (bold highlights mine)

In other words, it would be overly simplistic and imprudent to simply assess a security or a publicly listed company based on financial fundamentals without taking into consideration the security/company’s position in the nation’s political economic structure or even the political class behind the issue or the industry.

That’s because politicians and the domestic elite group have the laws and institutions behind their interests from where economic rent can be generated for the advancement of their personal wealth.

This means you can’t buy simply because of “cheap” PE ratios, because PE multiples won’t be enough to bring about economic windfall to the privileged class, it would take monopolies, laws that circumvent competition, political privileges (e.g. licensing), tariffs and other forms of implicit government support to attain these.

And it is of no question for me why some market participants’ position (including my mentor) have been based on “jockeys” or on “political affiliates” than from financial fundamentals.

At the end of the day, it seems hardly about markets but about political trends, networks and the underlying policies.

Nonetheless, inflationary policies still is the major force which drives the local equity market.