Entitlement and competence
The decision of the Lopez Group of Companies (Lopez Group) to sell a 20% interest in electricity distributor Manila Electric Company (Meralco) last week to telecoms provider PLDT was an acknowledgement of the politically inevitable, the execution of a financial and debt service strategy, and the implementation of a brand rehabilitation program. In a matter of days, the Group addressed its three biggest challenges in a revolutionary way that many suspected but couldn’t help being surprised by when it became reality.
For the Lopez Group, the tradeoffs required to maintain a controlling interest in the Philippines’ largest electricity distributor simply no longer made sense. While it might have been able to effectively address some of those tradeoffs – which involved resisting political and regulatory pressures, dealing with emotional consumer ire, and addressing stagnating profitability – collectively the energy and resources required to manage these challenges could clearly be used with better results elsewhere. And now they will be.
It can be argued that much of the political and regulatory pressure on Meralco will likely disappear following national elections that are scheduled in a little more than a year, and that the Lopezes should have held on. On the other hand, pressure from one administration may have merely transferred to another. That’s typically been the case, although the current administration’s animosity toward the Lopez Group has been extreme, and ultimately resulted in the sale of government financial institution holdings in Meralco to San Miguel Corporation (SMC) and allied organizations, apparently in preparation for a boardroom showdown.
Given the high cost of electricity in the Philippines compared to the rest of the region, consumer unrest in an uncertain economic environment isn’t going to ameliorate either until prices come down. Ironically, Meralco’s options for dealing with high prices are limited, despite what its detractors say. High fuel energy costs – in part due to high government royalties on indigenously produced liquid petroleum gas and geothermal steam – are a big part of the problem. For example, the cost of indigenous LPG in the Philippines is more than twice the cost in Thailand.
These harsh realities have taken a toll on the Lopez Group brand, and frequently eclipsed charitable programs and other development initiatives undertaken by these companies. Those initiatives range from corporate social responsibility programs such as The Knowledge Channel – which provides educational programming for schools across the archipelago – to investments in clean energy made by the Group’s energy generation arm, First Gen Corporation (Disclosure: My firm has, from time-to-time, had a client relationship with various companies in the Lopez Group.).
News reports on Meralco typically refer to the Lopez Group as “a powerful Philippine clan,” and the companies, especially Meralco, are often discussed in the context of the Philippines’ perceived culture of entitlement. Because the Lopez family has both controlled and managed Meralco for decades, many in the Philippines perceive the Lopezes as a family entitled by virtue of history and tradition to run this important company.
That’s all changed. SMC and its allies now control an estimated 35% of Meralco. PLDT holds 30%, including the 20% stake it acquired last week. The Lopezes are left with 13%. Their alliance with PLDT – whose executives must have been alarmed over SMC’s recent expansion into the telecoms sector – means that the family will continue to have a significant say in how Meralco is managed. PLDT chairman Manuel V. Pangilinan is expected to block any attempt by SMC to leverage Meralco assets – such as using utility poles to string cable – for its own telecom services. Both PLDT and SMC vow that their involvement in Meralco is for the long term, regardless of whether SMC pushes through with its telecom venture, which could lead to disruptive boardroom disagreements.
This time, however, the Lopez Group brand will be largely insulated from the fallout associated with such a struggle. This provides the Group the opportunity to demonstrate its managerial competence in its now two core areas: 1) broadcast via the ABS-CBN networks; and, 2) power generation through First Gen and geothermal energy producer Energy Development Corporation.
For consumers, there are also likely to be benefits of PLDT-Lopez Group control of Meralco. One will be continued transparency of operations and finances, for instance, which would be less certain with SMC in control – the company recently spun off its beer division but neglected to include rights to the brands and real estate where its breweries are located. The new subsidiary is buying the brands and real estate via an $826 million bond offering.
While the culture of entitlement often seen in the Philippines won’t disappear soon, the Lopez Group likely won’t be held hostage to that perception going forward. And that presents a huge opportunity.