I recently had a spontaneous Zoom chat with friends from different business fields, driven more by our desire to check on how each other is coping with the pandemic.
These friends are successful industry leaders whose businesses survived and thrived despite being hammered by past financial crises and whose respective bottom line remains in the black. One is an expat CEO of a large manufacturing concern; two are presidents of large multi-national companies, and one is a country manager of a large equity firm. I met all of them during my early foray into business writing, and we never lost touch over the years.
The chat progressed into a scholarly exchange on how their companies have kept their heads above water and their projection of what lies ahead for the country in the near- and long-term. Most agreed that, as long as the country’s economic team remains focused, the Philippines will survive, albeit on a much slower economic pace. But any growth comes with the caveat that the political climate should remain stable. The pandemic, they chorused, has torn down global economic growth, and our country was not exempt from the fallout.
The discussion then veered into some business ventures which in the good days had injudiciously expanded too quickly. A friend brought up the case of Dennis Uy who has been recently in the news selling out some of his company’s assets to pay off debts. There’s nothing wrong with this, the others chimed in, for as long as Uy’s company assets can sufficiently cover all obligations and if the company’s debt servicing remains current.
Uy, the CEO of the country’s newest mobile operator Dito Telecommunity, has invested in several ventures—from food shops to energy firms—in a dizzying expansion binge that are all leverage-backed. The buying spree, according to the country manager of the equity firm, raised concern early on about Uy’s group debt standing, more so now that we are in the midst of a pandemic-generated recession.
In a recent stock exchange filing, Phoenix Petroleum Philippines revealed that “its board had mandated the management to enter into negotiations on a possible sale of assets or investments as part of its debt management and funding activities.”
The stock filing came in the wake of the sale of Uy’s 100 percent share in logistics venture 2GO Group, which has been chipping away Uy’s earnings in Chelsea Logistics and Infrastructure Holdings. The company sold the 31.7 percent stake to conglomerate SM Investments for around P6.6 billion ($136 million). “The proceeds of the sale will be used to pay down the loan obtained for the acquisition of the shares,” Chelsea announced.
SM bought the shares at P8.50 each. By this time, SM should have already filed the mandatory tender offer documents to the Securities and Exchange Commission. In this mode, minority shareholders are offered a chance to walk away with similar terms during buyout transactions.
Recall that in 2017 Chelsea obtained a $220-million loan from the Bank of China to support the purchase of its 2GO stake. It somehow lessens pressure on Chelsea, which saw its net loss tumble to P367.2 million during the first nine months of 2020. Its overall losses for the period hit P2.6 billion, undermining profits from the previous year, as pandemic wrought havoc on Philippine business.
“With the divestment, Chelsea will not be impacted by 2GO losses, which will aid the company in recovering from the current Covid-19 pandemic,” Chelsea Logistics President and CEO Chryss Alfonsus V. Damuy said in a stock-exchange filing.
Phoenix, on the other hand, has been financially bleeding as Covid lockdowns put a brake on the transportation industry. This is one of Uy’s earliest ventures. He was a virtually unknown businessman from Davao whose fortunes grew when President Duterte became president. Uy, who donated P30 million to Duterte’s candidacy, has acquired 36 companies since 2016. He took over shipping lines; the Philippine franchise of the Family Mart chain of convenience stores; a food and management school; a logistics hub, and Ferrari car dealership. Uy’s other capital-intensive projects involve a $1-billion integrated resort and casino, and Dito Telecommunity, which was launched several months back. Uy’s telecom firm is mandated to invest at least $5 billion over a period of five years.
An official of Uy’s Udenna Development contacted by BusinessWise who begged for anonymity defended his boss’ buying binges. He said that Uy’s main motivation is to fast-track the country’s economic growth under a President whom Uy believes can lead the country to economic prosperity. Uy himself was quoted by Nikkei Asia in 2017 as saying: “[When] you believe in the leadership, you believe in the potential of the country.”
The Udenna official allays fear about the group’s mounting debts. He says the group’s debt-to-equity ratio had improved from 3.09 percent in 2018 to 2.7 percent in 2019—latest figures are unavailable—which is still higher than those of other Philippine conglomerates. In 2019, Udenna net profited P3.39 billion on a record P110.67 billion revenues, he said.
Most company officials in the group chat believe that Uy has spread himself too thinly.
Udenna’s debts skyrocketed by over 200 percent to P104 billion in 2017, with most funds poured for investments and acquisitions. They assume that part of the proceeds from the sale of Uy’s assets could be used to partially finance his revenue-generating investments in telecommunications, oil, and infrastructure in order to lessen his bank borrowing. As it is, however, the expat of the large multi-national company in our group chat believes that Udenna’s debt-against-profit comparison doesn’t look good, saying that the company has a feeble balance sheet.
Still, the Udenna official remains confident that Uy’s group is taking the right step: “It’s just a hiccup and considering the effect of the pandemic on global and local business, we’re not the only one trying to survive under these trying times. Our finances as per our books remain sound and there’s no imminent danger for us to be worried about.”
But the general sentiment in our group chat is that Uy has to work doubly hard to keep its balance sheet healthy. Has he bitten more than he could chew? At the moment, it looks likely, but it would be interesting to see the results of the corrective steps his company has taken. It could prove crucial in his effort to borrow more. It helps that banks are betting on his relationship with Duterte. But once the loans have ballooned to unmanageable levels and the balance sheet wobbles, it would be worth watching if Uy would lose the trust he currently enjoys.
For comments and suggestions, e-mail me at mvala.v@gmail.com