Holy Crap! PLDT Acquisition of Digitel, Operator of Sun Cellular, Now Confirmed!

IN THE NEWS from GMA News Online

At 1:47 PM today, GMA News Online confirmed PLDT's purchase of a 51.5% stake in Digitel, the operator of number 3 local mobile carrier Sun Cellular, for 74.1 billion pesos. Let me point out now that there must be a mistake with these numbers since Digitel only has 6.36 billion shares outstanding, which makes the offer equal to 22.63 pesos per share, which can't be right since the Digitel stock was last traded at 1.83 pesos yesterday. Anyway, we'll make the necessary corrections as more accurate information becomes available later in the day.

The deal brings Sun's 15 million subscribers into the PLDT fold, which includes Smart Communications' market-leading 40 million subscriber base. As I pointed out in a previous post, the consummation of this acquisition would place tremendous additional pressure to erstwhile second-placer Globe Telecom and its 25 million subscriber base. Last month, Globe reported a 22% decline in net income from the same period last year.

The two telco giants are expected to complete the acquisition process by the second quarter of 2011.

Digitel and JG Summit Holdings earlier today voluntary decided to halt trading halt due to a "major shareholder transaction." Yesterday, Digitel and JG Summit experienced huge one-day gains at 18% and 8%, respectively. At the end of today's trading, PLDT shares ended flat at 2,036 pesos and Globe surprisingly up by 7% at 746 pesos.

Congratulations to those who decided to buy Digitel shares last week (especially those who bought on Friday, after I posted the rumor article). You guys are in for humongous payoffs once trading for Digitel stocks resumes. :D

[UPDATE As of 2:57 PM]

As per ABS-CBN News, the 74.1 billion is not just for 51.5% of Digitel's stock (which is currently held by parent JG Summit), but is also for a convertible bond, payment for 34.1 billion pesos worth of Digitel's outstanding debt, and consideration for Digitel's remaining stock held by minority shareholders. And the deal is a share-swap transaction, with PLDT offering new stock (instead of cash) to JG Summit for the assets in question.

Unfortunately, there is still no clear per share offer figure for Digitel's stock, which is the information most investors would be more interested in.

[UPDATE As of 3:12 PM]

PLDT's official press release

6 Steps: A Guide for Newbie Investors (Part 2)

Here's a recap of the things we discussed in Part 1:

1. Eliminate and avoid excessive and expensive debt. Paying debt interest could significantly impair your capacity to accumulate capital for investment.

2. Build up your emergency fund. Maintain around 8 months worth of living expenses in liquid and stable instruments for unforeseeable financial needs.

3. Start investing. Invest in higher-yielding assets with manageable risk to to gain experience and be more comfortable with owning a portfolio that could lose value in the short term.

Once you have accumulated enough capital and investing experience, it's time to move on to the next three stages of a successful investing plan.

4. Invest more systematically

After establishing your initial investments, you can now invest on a more regular and deliberate basis. This means prioritizing what you set aside for investments by committing a set peso amount every pay day, for example. At this step, you can start investing in higher yielding securities like equity funds (e.g., equity UITFs, mutual funds, or index ETFs) and prepare for a longer-term investment horizon. People usually enter this stage in their 30s or 40s, particularly when they have achieved a more comfortable spread between their income and periodic expenses.

5. Invest in the long run

This next step is for investors who have set up a stable emergency fund and have already established a systematic investing plan. When you start making significantly more money than what you earmark for expenses and systematic investing, you can start investing strategically by managing your portfolio in such a way as to balance out losses with gains in other asset classes. In this stage you construct a diversified investment portfolio consisting of assets that are not perfectly correlated or do not perfectly move in the same direction. Perhaps the best illustration for this would be how bonds and stocks generally respond in opposite ways to different market shocks or conditions, as what we have been experiencing in the past few weeks with the events in the Middle East and the tragedy in Japan where stock prices have dropped considerably while bonds have become more expensive. You continue with the long-term investment horizon you started out with in the previous stage, and readjust the proportion of your holdings according on your risk aversion (i.e., more bonds if higher) and needs (i.e., typically more bonds as you get older).

6. Invest in speculative assets

This last stage is something I'm not very comfortable with since it's essentially just betting on something based on nothing more than a plain and simple guess, and it's something you only really learn with experience. Speculative investing covers strategies like stock picking and forex trading, and investments in assets like commodities, collectibles, and financial derivatives (like collateralized debt obligations and credit default swaps that have become infamous during the 2008 financial crisis), among other things. These strategies and investments feature a significant amount of risk but also the promise of very high returns which attract people who want to strike it rich quickly; some of these investors sometimes even use debt or leverage to boost the upside potential of their investments, which usually also amplifies risk to dangerous levels.

Because of the very high level of risk this step involves, many investors avoid it altogether. To end, in my opinion, you should only enter this stage if you're 100% comfortable with what you're doing and know all the risks that are involved; if not, just stick with step 5 and you'll still end up a highly successful and fulfilled investor.

PLDT Set to Buy Digitel

FROM THE RUMOR MILL

Earlier today, I received the following email from one of my former students:

Sir! I need your advise! hahahaha.

kasi my dad told me na there are rumors daw that pldt is buying digitel and people are buying digitel stocks now. I want to buy sana kaso, should I? HAHAHAHA. 1.66 lang naman ang price per share kaya cheap investment siya but still, baka masayang pera ko... hahaha.

So, how does one go about analyzing this situation? Of course, the ordinary investor (that is, someone like me) would not have a reliable way of confirming if the rumor is true. But let's say, just for the sake of argument, that it is: let's assume that PLDT is indeed planning to buy Digitel soon but hasn't announced it yet. Given that, and with the information at our disposal, what would be the best course of action?

As with any purchase or investment decision, perhaps what we should consider first is the price of the asset in question. Is the stock still cheap enough to allow for considerable gains in the near future, or has the price already been substantially driven up by those who acted on the rumor ahead of the rest of us? Here's the stock price of Digitel in the past 6 months:

That's a pretty high 23% jump from a week ago, don't you think? Especially given what happened in Japan and what has been happening in the Middle East in the past few weeks. So does this mean today's closing price of 1.62 already reflects the acquisition rumor? Unfortunately, things aren't as clear cut as that, especially if we consider that six days ago, on March 18, Digitel announced a 65% year-on-year increase in net income. With this information, the 23% increase in stock price now doesn't seem too unreasonable, does it?

Perhaps we should look at other signs, like similar transactions that happened in the recent past. Unless you live under a rock or you're always too busy monitoring your Facebook news feed, you should have heard something about Alliance Global's purchase of a 60% stake in Fil-Estate Land late last year. Here are some important details of that transaction:

The deal was announced on December 22, 2010, with an offer price of 1 peso per share; Fil-Estate Land's stock closed at 0.92 per share the same day, 21% higher than its closing price the previous week of 0.76. In the following 5 weeks, the stock shot up to 2.41, a 217% increase from the pre-deal price. Today, the stock has stabilized close to 2 pesos per share, which is still 100% more than the offer price. It looks like everyone but me has become filthy rich from this deal.

What has this got to do with the Digitel rumor? Well, since history has a knack of repeating itself (sometimes), there's a sizable chance that investors who would buy Digitel shares before the deal is announced would earn a handsome payoff. But even without the Fil-Estate example, high returns for those who would be in the game before the announcement would not be out of the question; whenever a firm decides to buy another firm, the buyer always pays a premium to get what it wants. 

Why would PLDT want to pay a higher price for Digitel stock than what the market dictates? The acquisition of Digitel, should it happen, would greatly reduce the competition in the local telecoms arena and turn it into a virtual monopoly. Sun Cellular in the hands of MVP would further strengthen Smart's position as the market leader, and Globe would become more of a lame duck than it already is. If the deal pushes through, you may have to say goodbye to the all-text/all-call promos that you've enjoyed over the years real soon; the sweetest advantage of being the undisputed market leader is that you can pretty much jack up prices anytime you want, especially in a regulatory environment that is as inutile as ours.

Whoa, hold your horses, some of you may say. What about antitrust? Surely, the government would not allow something like this to happen? Click this link for the answer.

So what was my reply to my student?

If you believe the rumor, buy shares ASAP.

But remember, that's a very big IF.

And if you want really do your homework and look at actual numbers, here are some helpful sources information about Digitel:

Financial summary from 2006 to 2009

Annual Report for 2009

6 Steps: A Guide for Newbie Investors (Part 1)

Interest in personal finance and investing has grown considerably over the years. Many scour the Internet for advice about the whys, whats, and hows of investing as formal and structured financial training is often either lacking or insufficient. But while helpful and reliable sources of investing information abound online, a practical and cohesive framework for investing is hard to find.

This post is a guide for "newbie" investors, particularly those who are just starting out in their careers. It shows  a sequence of actions beginning investors can follow to manage risk efficiently and maximize returns by boosting capital accumulation, preparing for unpredictable situations, and gaining investing experience. More experienced investors can also use this guide to assess the soundness of their own financial plan and make appropriate adjustments.

1. Eliminate and avoid excessive and expensive debt

Debt places a great burden on your ability to save and accumulate capital for investment. Interest on virtually all consumer debt is debilitatingly high and could add 5,000 pesos upwards to your monthly expenses, money you could instead use for your emergency fund or investments. It's unfortunate that even when global interest rates fall, like what happened as a result of the 2008 financial crisis, interest rates on consumer debt in the Philippines fail to adjust correspondingly. The perennially high-interest environment makes it financially sensible to completely pay off or altogether avoid debt before you even begin building up your cash reserves.

Your debt level is ultimately a function of your income and consumption: the more you earn, the less you need to borrow; the more you spend, the more likely you'll incur debt. And since most individuals have little control over their income, the best way debt can be managed is to control expenses. Avoid purchases that you can't pay for with cash and zero in on your credit card balance; delay major but "necessary" purchases like cars and real property until you're able to pay a sizable down payment and/or have enough income to easily accommodate monthly loan payments.

2. Build up your emergency fund

I have already discussed this topic in detail a couple of weeks ago. An emergency fund is your insurance against unforeseeable financial needs. It is basically a reserve of cash kept in liquid and stable financial instruments like checking accounts or money market funds that you maintain and prioritize over investments in risky assets like stocks and bonds. You can start building up your savings as soon as you have reduced your debt balance to a minimal level and continue until you've accumulated around 8 months' worth of living expenses.

3. Start investing

After establishing a stable emergency fund, you can start investing in higher-yielding instruments. At this point you have to focus on assets with relatively lower risk, like bonds, bond funds, or balanced funds (i.e., a diversified mix of bonds and stocks). The objective of this stage isn't so much to maximize returns, but to gain experience and be more comfortable with owning a portfolio that could lose value in the short term.

Most investors would enter this stage in their twenties or thirties, when the growth in income has significantly outpaced the growth in expenses. However, it is important to start as early as possible to maximize the effects of compounding and the time value of money: it can be done the old-fashioned way, by working hard to earn a promotion, for example, or just by being a more judicious spender. Also, seeing your money grow over the years will give you more confidence in considering riskier but more financially rewarding investments.



Click here for Part 2.

True Happiness?

FINANCIAL TUMBLR-ISM

If you spend enough time thinking about it, you'll find at least ten specific implications of this statement, half of which you'll probably disagree with violently. But if you think about it some more, you'll eventually realize that the statement is actually true and that altruism and selflessness are really just illusions.

Then again, maybe you'll just conclude that I'm just too lazy to write a "real" post, in which case you'll be mostly correct since I just got back from a long and tiring research-related trip in Manila.

Something more worthy of your attention and time should be waiting for you on Wednesday. Until then, here's to a good night's sleep, selfishness, and true happiness. :)

4 Questions about Building your Emergency Fund Answered

DEAR INVESTOR JUAN

Dear Investor Juan,

I can't say that I'm a newbie in investing but I actually have a mutual fund from PAMI (Philamlife) which is the GSIS fund. I had it since Q1 of 2008 and was able to overcome the global crisis. It gave me a good return of 40+% this year. My plan now is to start investing in equity funds from BPI or BDO for my future goals. But my main concern right now is where to put part of my emergency fund that can give me better return than time deposit accounts. I already know that it must be in safe and liquid form. I am considering SDA, money market funds and treasury bills/bonds. What are your thoughts about it and any suggestions? I am not comfortable with bond funds as its navps/navpu is also changing like the balanced and equity funds so I'm considering it as not safe. Please correct me if I'm wrong.

Thanks in advance. Keep up your great blog! Cheers!

Danison


Dear Danison,

First of all, congratulations for earning that huge post-crisis return! Keep up the good work. ;)

Second, I hope you won't mind if I use this post as a venue to discuss emergency funds, in general, even if you have a more specific concern.

Any financial adviser worth his salt would tell you that building an emergency fund is the first stage of an effective financial plan (or second, if you count getting out of debt as the first step): you have to have your emergency fund intact before you can even think of investing in bonds, stocks, or other risky financial instruments. But what is it for? Why do we have to have it? Here are some questions about many people have about emergency funds answered (yours is #4).

1. What is it? As the name suggests, an emergency fund serves as some kind of insurance for "emergencies" or unforeseeable situations where you'll need more cash than you normally do. But unlike the usual kinds of insurance which cover specific events, this one covers everything and anything that can happen.

Because of its specific purpose, your emergency fund would have specific characteristics that would set it apart from other components of your portfolio, as you have already mentioned in your note. First, your emergency fund would have to be liquid enough -- not so liquid that you could be tempted to take a bite from it for "non-emergency" expenses, but accessible enough so you can use it when you actually need it. Second, it should be safe, with no or little risk of loss. Of course, the trade-off in achieving these features is that we sacrifice return, an important issue that we'll go back to later.

2. How does one start? The only way one starts building an emergency fund is by saving deliberately and consistently by making it a priority rather than just a byproduct of spending. To get started, here are a few things you can do to curb your consumption and boost your savings.

3. How big should it be? Looking at the slew of financial advice one can gather from the Internet, we get around 6 to 8 months worth of expenses, but that's more a rule of thumb than a hard and fast rule. The heuristic is based on an estimate of how long it would take you to find another job if you lose your current job: the longer this period is, the bigger your emergency fund should be.

4. Where should you keep it? Remembering the purpose of the fund should guide you in choosing the financial instruments you should consider; liquidity and safety should be your primary considerations rather than return. You're right, bonds and bond funds have no place in your emergency fund as these can be as volatile as stocks and so pose a significant risk of loss. With Special Deposit Accounts (SDAs) -- safe, time deposit-like instruments which feature marginally higher returns for higher minimum required investment amounts -- time deposits, and T-bills, you sacrifice liquidity; you can't afford to have your emergency fund out of reach even for a month, it defeats the purpose. If you really want to earn some return on your fund, I suggest that you put it in a money market fund where you can earn T-bill like returns without sacrificing liquidity too much -- most funds would require you to only pay less than 0.5% if you redeem within 7 days. Finally, if we ignore returns and just concentrate on liquidity and safety, you can just keep your emergency fund in a checkbook savings or checking account; only consider an ATM account if you think you can handle the temptation of having ready access to your fund.

Groupon: Deal or No Deal?

I was skeptical at first, of course. Discounts of 50% or more on meals and other stuff--ranging from spa treatments to soap-making lessons to 42-inch LCD TVs (for just around 22,000 pesos, I am so tempted to buy!)--just seemed too good to be true.

Then I came across this deal a few days ago:

The sub just looked so stuffed and appetizing! Of course I checked customer reviews at OpenRice first, where I saw 22 positive ratings and 0 negative. And since the price wasn't bad (29 HKD is around what you'll spend at a McDonald's or KFC), I finally gave in and bought one voucher.

I redeemed the voucher yesterday. Apart from having some trouble finding the place (it was right within the innards of Central district), the experience had been quite pleasant. The food was as good as advertised, so the next time I'm in the neighborhood I'll probably pay Delicieux Bistro another visit.

Based my experience so far, some of these Groupon deals really are "deals" that can save someone a bit of money in the long run. Groupon has apparently gotten quite big here in Hong Kong since it was launched early this year: it now has around 250,000 fans in Facebook. Of course, clone sites have sprouted as well, but I'm hesitant to try these sites out. But ever since my Delicieux buy, I have bought two more deals: a 20 HKD meal at a nearby Taiwanese restaurant and a pair of JVC headphones for 168 HKD (928 pesos).

I understand that the "group buying" phenomenon is even bigger in the US, and fanatics have been know to suffer from "Groupon remorse." It happens when consumers buy deals that they never redeem, apparently after having gone through a "What a deal!" followed by "Why did I buy that?" frame of mind. It's good news for sellers, of course, since they earn money for undelivered and unrendered goods and services.

I'm not sure how big this is in the Philippines, although I know that there also are several other sites offering the exact same service as Groupon's Beeconomic. When I go to the Philippines site, I only see deals I wouldn't buy, although I'm not sure if it's always like that or if others more or less feel the same way. But considering the imperfect state of our online payment system (both on the buyers' and vendors' sides), I have a feeling that it will take time before the Groupon business model completely takes off in the Philippines. Which is quite unfortunate, really, because there are many ways the service can benefit us consumers in the long run.

6 Criteria You Can Use to Pick Winning Stocks (Part 2)

Click here for Part 1

To recap, here's what we had last time:

1. Stock quality. Avoid speculative stocks.
2. Profitability. Only pick companies that actually do make money.
3. Dividends. Stable, consistent dividend payments signal a firm's health.

In this post, we round up the list with the last three criteria you can use to choose winning stocks.

4. Business life-cycle stage

I'm leaning more towards the mature, "cash cow" firms, if you take criteria 3 above as a hint, and I'm sure many, many others will disagree. Conventional wisdom says pick "growth stocks", which, like most things that come from conventional wisdom, is easier said than done. Growth potential is precisely just that--potential; one can be 100% sure only after the fact, and by then the proverbial ship will have already sailed and the stock will already be too expensive. And remember, there's an underlying logic behind growth: investments in research and development, a culture of innovation, unsaturated markets, low competition--it doesn't grow on trees. And these prerequisites are things most, if not all, of the listed stocks in the Philippines are short of.

Cash cows, as the term suggests, are firms that just rake in the money, mainly because of two reasons: one, almost always they are market leaders (see criteria 5), or are in very favorable competitive environments (monopolies or collusive oligopolies); and two, because they have tried-and-tested business models. The only thing you need to be careful of is if a company is too heavily reliant on a particular product or service that's at the risk of becoming obsolete soon. Although, if you're investing in the Philippines, things that should already be obsolete usually get to live on for a few more decades, as long as they still make money; think along the lines of the jeepney or the much-debated (and frustratingly heavily-protected) plastic bag.

5. Market position

Nothing beats being number one. The most important advantage of a market leader is that it can be a price setter, as long as the industry is not regulated. A friend who worked at KFC related how someone from Jollibee would call their office from time to time to tell them about an impending price increase, just so they could adjust their prices accordingly. Having this kind of control on pricing would ease the pressure on your margins, even if you're in a competitive industry, and result in more stable earnings or even earnings growth.

Also, a market leader would most probably have a large, deeply loyal customer base that would be the source of consistent and considerable earnings. And as long as the firm takes care of this valuable asset and does not screw things up too much, its stock wouldn't go anywhere but up.

6. Relative price

As measured by a readily available metric, the P/E or price-to-earnings ratio. Two kinds of P/E are often quoted: the true P/E is equal to the stock price now over the forecast earnings per share (EPS) next year; the trailing P/E uses the last quoted EPS instead of the forecast. The theoretical advantage of the P/E is that it's forward looking since it takes into account expected future earnings; the very real disadvantage of it is that forecasts are usually nothing more than guesses that are heavily weighted on past performance anyway. So in my opinion, trailing P/E is actually more reliable; if you have any reliable information that a company's earnings will rise considerably in the coming year, then by all means, adjust the trailing P/E accordingly.

Using the P/E ratio is not an exact science, but rather involves crude rules of thumb; my crude rule of thumb is that if a stock has a significantly higher P/E than the index (e.g., PSEi) P/E, then it's too expensive and I wouldn't consider buying it. In any case, the logic works like this: if a stock has a "high" P/E, it could only mean one of two things: the stock has low earnings at a particular price or a high price given a certain level of earnings. If it's the former, then clearly the stock is no good; if it's the latter, then the high price should reflect the stock's potential for growth as seen by investors (they set the price, remember?), which is definitely good, or that the stock is just overpriced, which is definitely bad. Examples of stocks that would justify high P/Es would be tech stocks--but we don't have those in the Philippines, or anything that closely resembles those, do we? So when something has a high P/E I would just take it to mean that the stock is overpriced, which is bad. But you already know that, which is good.

There you have it. Six "rules" that can help you construct a winning portfolio.

By the way, some of you may ask, how are we going to make money out of these stocks? There's no growth!

Right, there isn't. Which is a good thing, since then there would also be little chance that you'll lose everything when global markets go crazy.

We make money two ways: first, earn modest returns from dividends, slowly but surely; second, make a killing when the market becomes irrationally exuberant and everything goes up.

That's it. I hope all of this makes sense and is not too crazy.

Anyway, good luck to us. In investing, it's something we can never have too much of. :)

BSP Files Additional Charges Against Legacy

IN THE NEWS from Inquirer.net

State prosecutors of Danao City, Cebu, found probable cause to charge Legacy officials -- led by its owner, Celso De Los Angeles Jr. -- with syndicated estafa committed by Rural Bank of Carmen, the group’s unit in the province.

Apart from De Los Angeles, the ten other officers charged include Alexis Petralba, Namnama Pasetes-Santos, Roy Hilario, Virgilio Odejar, Ronaldo Alix, Christine Cruz-Limpin, Mike Basangan, Fernando Rafanan Jr., Cecil Invencion and Reynaldo Manit. According to a BSP lawyer, six of these 11 Legacy officials -- Petralba, Odejar, Pasetes-Santos, Hilario, Cruz-Limpin and Rafanan -- have already evaded arrests are now in hiding.

If you're unfamiliar with this case, Legacy is a group of rural banks all over the country which allegedly engaged in fraudulent activities specifically by offering “double your money” schemes that did not live up to their promise. These "strategies," which involved five- and six-year of time deposits with the “false promise” that the invested funds would earn 20 percent per year, managed to collect as much as 435 million pesos from the Rural Bank of Carmen alone.