How the Ayalas Surrendered Control in Manila Water to Razon, and Why
Minutes before the trading in the Philippines Stock Exchange closed on Wednesday, February 6, Ayala Corporation dropped another bomb.
The country’s oldest conglomerate is giving up control in Manila Water Corporation, one of its cash cows, to give way to its recently announced business partner, Enrique Razon.
Just three days ago, on February 3, Ayala disclosed it is letting Razon, a ports and casino tycoon, into the water concessionaire. The price tag: P10.7 billion for a 25 percent ownership.
The new announcement means that on top of the ownership stake Razon is paying for, the Ayalas are adding a cherry on top: voting power.
Translation: in the boardroom where major decisions on the future of the water concessionaire are voted on, Razon will rule.
How exactly will the single biggest shareholder of Manila Water lose its power to steer the water business toward where it wants to go and how it wants to be? And why will the Ayala group surrender control?
The official reason is this: The two business partners want to “strategically rationalize the economic and voting stakes between Ayala and Trident Water (of Razon group) as strategic partners in Manila Water.”
Let’s parse that out.
When the dust has settled—or after the regulators, creditors and others have approved these deals—not only will Razon have a 25 percent ownership stake in Manila Water, he will also have 51 percent of the voting rights.
His 25 percent stake, which will be coming from the purchase of common shares, makes him only a minority owner. He can just sit there during board and committee meetings, question decisions, propose changes, share insights from his other businesses. But at the end of the day his ideas will only be acted upon if other board members agree with him.
That’s fine with some investors because they’re probably still getting their feet wet, or simply want the pleasure of becoming a boardroom insider. It allows them to have a front-row seat on how a business is run.
But it seems Razon wants to plunge right in. The Ayalas granted him a louder voice in the boardroom and a more decisive control of all things Manila Water.
To do just that, one option is to go through the usual route: buy more common shares and increase his total stake. That will require him to shell out more than just P10.7 billion.
It just so happens that the way Manila Water is structured is more nuanced. How corporate ownership and control are designed in Manila Water is similar to that of other Ayala firms, as well as telephone giant PLDT, conglomerate San Miguel, media company ABS-CBN, and some of the Lopez group’s power firms.
Enter preferred shares.
In the case of Manila Water, it has several preferred shares, including a cluster of four billion shares tucked under an Ayala subsidiary called Philwater Holdings Company.
In Manila Water’s financial books, these preferreds are only worth P400 million but they are imbued with a power like no other: voting rights.
The entire exercise brought to light how impermeable the Ayala group’s control over Manila Water is.
It isn’t only through Ayala’s vanilla ownership shares. On record, Ayala Corp’s direct common shareholding in the water firm accounted for 41.99 percent as of September 2019.
That will be diluted to 38.6 percent when they eventually make way for Razon’s 25 percent.
The other—and less familiar—ground for corporate control lies in Philwater, a wholly-owned subsidiary of the Ayalas. Philwater’s preferred shares means Ayala Corporation controlled a hefty 65.95 percent of the voting rights in Manila Water.
Technically, because Philwater’s preferred shares are “voting, participating, nonredeemable and nonconvertible,” only the Ayalas can claim ownership to it. What they ceded to Razon via “proxy” is only the voting rights of the preferreds.
Lodging massive voting rights on usually placid preferreds is a textbook strategy for companies to protect themselves from corporate raiders. Business owners can shield themselves from a hostile investor who may hoard shares from the open market to afford a board seat or more, but get stumped when he or she finds out the power to vote is separate and beyond reach.
A beleaguered company whose stock price has plunged can also protect itself from unwanted buyers by granting the preferred stocks with special voting right to—pardon the pun—a preferred group. In corporate parlance, that friendly group is typically referred to as a “white knight.”
Is Razon the “white knight” the Ayalas need for Manila Water now?
Coming up is a renegotiation of the water concession contract sealed in 1997 between the government and two operators: Manila Water for the east zone of the capital region, and Maynilad Water Services for the west zone.
This contract review and its triggers—President Rodrigo Duterte’s public rants against the water concessionaires and members of the Ayala family—have covered the private firms with gloom and uncertainty. The contracts are supposed to last until 2037.
Manila Water’s share price nosedived from a 52-week high of P27.50 to P12 just before Razon’s entry was announced. With a 51 percent controlling stake, this deal triggers the tender offer rule which requires him to offer the same buying price of P13 to all stockholders. With Manila Water currently trading above P14, it's unlikely that investors will take that cheaper offer.
Razon is widely considered as the Ayalas' shield against the political and regulatory risks Manila Water is now facing. The billionaire is perceived as an ally of Duterte, as well as that of former president Gloria Macapagal-Arroyo, under whom Razon’s port business aggressively expanded worldwide.
Aside from his ability to maneuver around and thrive under several politicians here and abroad, Razon has also built a reputation for himself as a brash, no-nonsense, strategic businessman. He has successfully diversified into the casino and entertainment business, as well as energy and utility sectors. In November 2019, he was awarded the Wawa Dam project, which will supply much-needed water to distributors Maynilad and Manila Water.
Will all these be worth it for Ayala?
The fresh cash infusion will help stabilize Manila Water’s shaky financials. The year 2019 has been a challenging one for the company. Its net income in the first nine months already dipped 11 percent to only P4.4 billion.
This was even before Duterte brought up his grievances against the water utility companies in early December following a Singapore-based arbitration court’s ruling that the government must pay billions of pesos that Manila Water and Maynilad were unable to collect since they were not allowed to raise rates.
Plus, in a capital intensive industry like water services, there are billions-worth of debts to settle or rollover.
In some occasions the Ayalas have thrown in the towel—like when they let go of Purefoods (sold to San Miguel), FamilyMart (to Phoenix Petroleum), outsourcing firm Integreon (to private equity firms), Burger King (to Manny Pangilinan and Bert Lina groups). These break-ups were clean. The Ayalas didn’t linger around. They moved on to focus resources and energy on core businesses and others it considered crucial to last another 185 years.
The family doesn’t seem to be giving up Manila Water altogether. They are sticking around.