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We have no restrictions on foreign capital, and it should be to allow confidence and trust of foreign investors in the Philippines.
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We have no restrictions on foreign capital, and it should be to allow confidence and trust of foreign investors in the Philippines.
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FirstGen benefited significantly from the news that PT Barito Renewables made an offer to purchase the former’s subsidiary, Energy Development Corporation (EDC).
The unsolicited and unbinding offer valued EDC at US$5 billion, according to the report.
Consequently, FirstGen’s stock reportedly gained 18.4 percent on the day the offer was reported. Investors are clearly excited about the news as it suggests the company is significantly undervalued.
Relative to the current market capitalization of FirstGen of around P70 billion, the stake alone could be valued at twice that based on the offer price. Since FirstGen owns 45.8 percent of EDC, this would value its stake at around P140 billion at the current exchange rate.
Putting on my analyst hat, I would be clearly optimistic about the prospect of the monetization of a key asset at a price that, on the surface, would seem to generate significant returns for FirstGen investors.
But as some reports pointed out, there are some financial negatives that need to be considered since EDC is a major contributor to the cash flow of its owners. The loss of ownership of EDC would mean a reduction in the cash flow of FirstGen. So the choice would be loss of future cash flow versus big pile of cash in the present.
Ultimately, the question is what is the long-term strategy of the company?
FirstGen has been altering its portfolio of energy projects with the sale of its liquified natural gas (LNG) power plants and terminal in Batangas and purchase of a stake in the pump storage hydropower project of the buyer.
The sale of its stake in EDC may allow additional flexibility as it adjusts its portfolio of businesses. Whether the plan is a recalibration of the portfolio or a shift in style (to passive versus active management), the assumption is that it is meant to maximize returns (or create value) for shareholders — even the minority. Having said that and taking off my analyst hat and putting on my macroeconomist one, there are other considerations beyond the creation of shareholder value. How will the transfer of the control of EDC to a foreign investor impact on our energy security? With the enactment of key pieces of regulation such as the Public Service Act and Renewable Energy (RE) Act, foreign investors can own up to 100 percent of renewable energy utilities.
To be clear, foreign investors are very welcome in the Philippines and are critical to expanding our installed generation capacity and the successful achievement of our goal to have 50 percent of our power generation mix come from renewables by 2040. We need the necessary capital to grow our power supply to support our economic growth.
Local companies such as FirstGen have done a good job of expanding their portfolios to accommodate our energy needs over the past few years. But financing growth is limited by the balance sheet of companies and the appetite of banks and investors for risk in the power generation sector. Hence, the need for additional foreign capital.
However, EDC is the largest geothermal power producer in the Philippines and accounts for nearly a fifth of the installed RE capacity of the country. Looking at it from PT Barito’s perspective and their generous offer, they are likely looking at the replacement value of EDC.
Replacement value is how much it would take to build or replicate an existing asset at today’s value. The replacement cost may be more than the current market value and thus makes EDC attractive for foreign investors focused on geothermal. EDC has the proven technology, business model, and capacity of its geothermal source.
Offhand, it is difficult to assess how the potential sale of EDC would affect our energy security.
EDC is not a small contributor to our grid but there are larger power assets out there that are owned by local conglomerates. What may be more of a concern is whether shareholder value created by these investments are partly kept in the Philippines to fund future growth — whether in energy or another sector.
We have no restrictions on foreign capital, and it should be to allow confidence and trust of foreign investors in the Philippines.
However, the more we rely on foreign investors to provide the capital for growth, local businesses must remember that we cannot relax. For every additional dollar spent by investors in the Philippines, we need to match this, maybe not proportionally, but in some part. Because the reality of foreign investments is that a portion of the value created will be returned to the home country in the future. And this represents an outflow in our balance sheet.
PT Barito Renewables’ offer is something worth considering but it also signals that many Philippine assets are currently undervalued. Foreign investor confidence may be improving and local investors should be more optimistic.
But let us not forget that as permanent stakeholders in the Philippine economy, if foreign investors are busy investing locally, so should we.
