DMCI consortium wins bid for Maynilad stake

From BusinessWorld The consortium of DM Consunji Holdings, Inc. (DMCI) and Metro Pacific Investments Corp. (MPIC) yesterday won the bid for the government’s 83.9% stake in Maynilad Water Services, Inc., beating the only other contending group of Manila Water Co. and BPI Capital Investments. The DMCI-led group offered $447.23 million for the west zone water concessionaire, while the rival Ayala-led consortium submitted a bid of $399 million. Both bids are on top of the $56.7-million minimum bid set by state-owned Metropolitan Waterworks and Sewerage System (MWSS). MWSS chairman Oscar I. Garcia and government corporate counsel Agnes V. Devanadera yesterday opened the financial offers for the regulatory agency’s 83.9% stake in Maynilad. A joint DMCI-MPIC statement yesterday said the new venture, DMCI-MPIC Water Company Inc., will be a 50-50 partnership, with both stakeholders raising equities through internally generated funds and loans. Apart from its bid, which would be used as new equity in Maynilad over the next three years, the group would also have to pay the government $56.7 million in interest, advances and the value of the Maynilad common shares worth $22.7 million, the joint venture said in its statement yesterday. The group would also assume about $256.8 million in debt and restructuring agreements, it said. The transaction marked the second time the government has sold the water concession in western Manila since 1997, after it re-acquired Maynilad last year from a group of private investors led by conglomerate Benpres Holdings Corp. The weight of debt payments following the 1997-98 Asian financial crisis had led to heavy losses for Maynilad, with Benpres opting to put the water utility in rehabilitation before it exited the concession completely in July last year. Maynilad’s financial problems meant it could do little to improve its water revenue from a 1997 level of 35% of its potential income. It effectively lost 65% of the water it supplied through leakage or theft from its network. DMCI president Isidro A. Consunji told reporters yesterday that the consortium’s goal is to improve Maynilad’s long-term profitability and to improve customer service and value. "Our consortium ...submitted a...realizable, achievable plan to hasten Maynilad’s rehabilitation in a shorter timeframe than others had proposed. The DMCI-MPIC team brings...to the table a long history of creating turnarounds and returning value to our shareholders," he said. "We believe it was an aggressive bid, but we also believe that the company could be turned around," Herbert M. Consunji, DMCI vice-president and chief financial officer, told reporters in a separate interview. In a statement, MPIC chairman Manuel V. Pangilinan said his group’s experience in transforming organizations like Philippine Long Distance Telephone Co. and reducing debts of companies like Metro Pacific Corp. should provide considerable knowledge in taking on this new venture. "We are delighted that DMCI-MPIC has been successful with a prudent bid that could provide a more safe and reliable source of water for millions of consumers," the statement quoted Mr. Pangilinan as saying. "We’re very excited about the opportunity to work together to improve water services," MPIC president and CEO Jose Ma. K. Lim told reporters yesterday. A product of an extensive rehabilitation program recently concluded by Metro Pacific Corp., MPIC is a Manila-based investment management company focused on long-term value creation in the Philippines’ property and infrastructure sectors. MPIC will list its shares on the Philippine Stock Exchange under the symbol "MPA" on Dec. 15. "This is a great way to conclude our year-long restructuring program and the best way of introducing MPIC to the public," Mr. Lim said. Among others, DMCI has been engaged in providing water utility services through its investment and management of Subic Water and Sewerage Company Inc., the primary water and sewerage and sanitation provider for the Subic Bay Freeport and Special Economic Zone located northeast of Metro Manila. MWSS senior deputy administrator Macra A. Cruz said the notice of award may be issued today, Dec. 6, after the government privatization council approves the results of the auction. Maynilad used to be a joint venture between Benpres Holdings Inc. and the Suez Group of France, but the Lopez-owned holding company decided to get out of the water business after years of financial losses. Benpres filed for rehabilitation, which was approved 19 months ago by a Quezon City regional trial court. Turning the corner Learning from the experience of the Lopezes, the DMCI group vowed to implement a "strategic business plan" and inject enough capital to fund expansion projects to improve the company’s service to its 7 million customers. DMCI VP/CFO Consunji told BusinessWorld that the consortium is satisfied with the operations of existing management. "We believe that management is doing well. There is just a need to improve service so that there is consistent supply during peak hours or in the mornings," he said. He said the $447 million would be used to finance capital expenditures and refinance Maynilad’s existing loans. "The minimum bid requirement of $56.4 million will immediately go to MWSS as payment for unpaid concession fees," Ms. Devanadera said. DMCI-MPIC said it has devised a rehabilitation plan for the west zone, which covers Caloocan, Manila, parts of Quezon City, Pasay, Valenzuela, Parañaque, Muntinlupa, Malabon, Navotas, Las Piñas, and areas in Cavite. The first stage will involve conducting a system-wide water audit. Efforts will also begin to improve water supply and pressure management, enhance reservoir management and pump station efficiencies and to implement an overhaul of the system’s software and IT facilities. The second stage of the plan will involve replacing old water mains, conducting extensive post-rehabilitation network maintenance and improving overall service repairs and connections, with a goal of providing safe, reliable 24-hour water supply. DMCI VP/CFO Consunji said the consortium will deal with tightened water supply from the Angat dam by reducing Maynilad’s non-revenue water, or water lost to pilferage and defective pipes. Ms. Devanadera said that if DMCI-MPIC gets Maynilad out of rehabilitation earlier than 2013, the group may apply for a rate rebasing which can result in a rate increase in 2008. The average Maynilad rate is P30 per cubic meter. Under the original concession agreement, Maynilad is scheduled for rate rebasing by 2008. The move will allow Maynilad to adjust rates based on inflation, investments and foreign currency adjustments. No problem On the issue of Suez’s 16% stake in Maynilad and its superminority rights, MPIC’s Mr. Lim said the consortium does not see any problem. "We consider to Suez to be a partner and we look forward to working together with them. Right now, we don’t expect any difficulties," Mr. Lim said. In a chance interview yesterday, Suez Environment former regional director for China and Philippine representative Jacques Letondot said only that "We have no intention to sell the 16% and, as of now, we are glad that we have a new partner." East Metro Manila concessionaire Manila Water, which first bid for the west zone concession 10 years ago, said it would now focus on improving its service to its 4 million customers. "We congratulate Metro Pacific and DMCI consortium for winning the Maynilad concession area. We wish them success in this undertaking. We also congratulate MWSS and their financial adviser ABN AMRO for conducting the bid in a such a professional and transparent manner. The successful completion of the bid and the return of the concession to the private sector will be in the best interest of the government and the customers in the west concession area," Manila Water chairman Fernando Zobel de Ayala said in a statement yesterday. The winning bidder will now have to sustain and build on Maynilad’s P1.4-billion audited net income last year, a rebound from years of losses from 1997-2004. The P1.4-billion net income, however, was still short of the 1.9-billion target set by the rehabilitation plan for that year. That same plan set a target of P2.6-billion net income for this year. The firm posted a net income of P1.261 billion for the nine months to last September, with revenues totaling P3.93 billion. — Iris Cecilia C. Gonzales, Ruby Anne M. Rubio and Reuters/BusinessWorld