Is there a fish there?

The Senate smells something fishy about the P660M loan that DBP extended to businessman Roberto Ongpin to acquire the Philex shares that he subsequently sold to another businessman, Manuel V. Pangilinan. A lot of people also smell something fishy although, like me, they are as clueless as the blind man who wandered into a fish market, sniffed, and said, “Good morning ladies.”

Inquirer business columnist Conrado Banal III defended the deal:


    At the start of his takeover bid, MVP already acquired a 20-percent interest in Philex, made up of treasury stocks accumulated by Philex over the years. MVP also announced he would go to the stock market to acquire 20 percent more. It was clear that MVP intended to take controlling interest.

    In such a scenario, the DBP management (led by its former president, veteran banker Reynaldo David) started acquiring Philex shares, garnering about 120 million shares at an average price of P5 per share, about 2 percent of the outstanding shares, meaning, not enough for even just one board seat in the company.

    At the same time, market talk had it then that the GSIS also started to take position in Philex, buying even at a much higher price of P9 per share. When the Philex price reached P11 per share in the market, the DBP unloaded 10 million shares, apparently in a bid to average down its costs.

    In the market, meanwhile, it was known that Ongpin was also buying Philex shares. He even partnered with a well-known mining man, Walter Brown. And so when Ongpin learned that DBP was unloading, he offered a much higher price to the bank (P12.75 per share vs P11 in the market) for 50 million shares.

    Such a “block sale” is always good for the seller that is holding a relatively large chunk of shares, such as DBP. Unloading 50 million shares into the market would always push down the price. Always. If DBP had cashed in it profits by selling the shares in trickles, it would also tend to dampen the market price. No seller would want that, of course.

    Now, as part of the deal, Ongpin asked for a loan package from DBP, amounting to P660 million. The DBP management committee nevertheless asked Ongpin for P80 million cash upfront to pay for the shares. Also, Ongpin was to pledge the entire block to the bank as collateral to the loan.

    In other words, in case Ongpin went bust and could not pay for the loan, DBP would still have the 50 million Philex shares, and it would even be richer by P80 million, which was Ongpin’s down payment.

    The 50 million shares that Ongpin acquired from DBP, in effect, brought up his holdings in Philex to about 7 percent. So Ongpin could now turn around and offer his swing block to MVP.

    The negotiations between Ongpin and MVP took only two days—on a weekend. In any financial market, that is usually how fast the big players make decisions. For in the market, anything can always happen. Fund managers in fact make buy or sell decisions in a matter of seconds.

    The thing is, Ongpin and MVP agreed on a price of P21 per share—versus the P12.75 per share that Ongpin offered to DBP.

    In effect, our bright senators were saying that DBP should have gone straight to MVP to sell also at P21 per, instead of making the deal with Ongpin. How stupid the DBP management! They could not even look into the crystal ball to predict that MVP would agree on a price of P21 per!

    Nobody was saying of course that the block held by Ongpin was rather attractive to MVP. It would give MVP the controlling interest. For such a transaction, deal makers like MVP and Ongpin are always willing to pay for a premium. I doubt if the DBP shares of 50 million (acquired by Ongpin) could command a similar premium. They were only about 1 percent of Philex, versus the 7 percent block of Ongpin.

    The story goes that the SSS, still headed by Romulo Neri at that time, hearing of the deal between Ongpin and MVP, offered to sell its Philex shares. MVP rejected the offer. He already had controlling interest because of his deal with Ongpin.

    As part of the deal, Ongpin asked MVP to buy the rest of the DBP shares (the remaining 60 million shares, out of the 110 million the bank acquired in the market) at the same attractive price of P21 per.

    Here is the thing: Without the Ongpin deal, DBP would not have been able to ride with his P21-per-share deal with MVP.

    That is clear. Contrary to the bright assessment of some senators, DBP could not have done it alone. It did not have enough shares. It could only be a rider.

    Because the Ongpin deal allowed DBP to sell to MVP at P21 per (which SSS was not able to do) the bank made a cool P1.4 billion in the trading of Philex shares—in less than a year. On top of it, the bank earned P15 million in interest from the loan package it gave to Ongpin.

Meanwhile, former investment banker and management consultant, Leo Alejandrino, asks three questions:


    1. Why did DBP not offer its Philex shares to Pangilinan? The latter had officially announced five months earlier his desire to acquire upto 40% of the company. David, described by Ongpin as “one of the smartest bankers in the country”, had the legal responsibility particularly for an asset this size to get the best price through a transparent and competitive bidding process; yet he chose to deal exclusively with his friend -and now business associate and defender- Ongpin. The haste of the DBP loan further suggests the deal was wired all the way.

    2. Ongpin admits the loan was expedited because the market price of Philex was already at P12.75 thereby threatening the deal. Rather than fast track the loan should this not have prompted DBP to slow the process and rethink the price?

    3. Was there a conspiracy to defraud and by whom?

My take:

Why didn’t Manny Pangilinan buy DBP’s Philex shares at P11? Why didn’t he buy the shares held by GSIS and SSS? If he had done that, Ongpin would have no swing block to pump up the price of his shares to P21.

Thanks to Manny Pangilinan who announced early on that he wanted to acquire control of Philex but did not take measures to ensure his balls would not be caught in the vise of Ongpin and David, the DBP made money and Ongpin made even more money. Pangilinan controls Philex. Everybody happy. But why do I still smell fish?

Manuel Buencamino

Buencamino was a weekly columnist for Today and Business Mirror. He has also written articles in other publications like Malaya, Newsbreak, "Yellow Pad" in Business World, and "Talk of the Town" in the Inquirer. He is currently with Interaksyon, the news site of TV5. MB blogged for Filipino Voices, blogs for ProPinoy and maintains a blog, Uniffors.com. Game-changers for him, as far as music goes, are Monk, Miles, Jimi, and Santana.

  • J_ag

    I think cognition or a lack of it is a factor here. All markets whether financial or otherwise depends on the free flow of information. Shares of stocks are simply derivatives of  the future value of company’s profits. All three men were on the board of the same company. They are privy to companies plans for the future and also are well aware of the bull market in commodities that are part of the increase in demand from emerging markets and the continuing instability in currency markets which are derived form competing macro economic policies of states. 

    UPNN ignorantly postulated about the Hunts who by themselves engineered a bull run in the price of silver. They themselves facilitated the demand and rise in prices. Not so this time.  There are voices in high places and men who are proposing that we move back to micro economics and abolish the macro economic management of the economy.

    The ideological battle is raging in the West about austerity vs stimulus and money printing. The right so to speak does not want any part of macroeconomics. They want it dismantled with many arguing forcefully for a return to the gold standard. 

    When MB mentioned the COA report he also did not recognize the importance of having the market informed that the DBP would like to unload and would supply buyer’s financing.   Ongpin could not have been the only one who knew that Pangilinan was on the lookout for bulk shares to take control of the board. Also the COA is not authorized to delve into the workings and operations of PHILEX. 

    Unfortunately very few civilians know the importance of due diligence most especially in the mining industry..

    The cost of exploration, extraction and processing are capital intensive. Example if the insiders at Philex know that they have measurable reserves of gold and copper that are worth exploring they have to spend millions to verify that these measurable reserves so they become proven reserves which become bankable… That is where stock valuations can skyrocket… 

    It is like an oil strike. Explorations for oil for instance move in on areas with believed oil in place. However they then will verify if the oil is recoverable with present technologies. Once verified they become oil reserves.  These are all done with certified experts whose reports can be trusted and are used to arrange financing for the extraction process. 

    Ongpin and Pangilinan are investment bankers but Manny runs the private equity group for the Salims of Indonesia.  They have deep pockets.  Hence these guys will pay a premium over prevailing stock prices. Plus the float for companies in the PSE is very limited. The SSS and GSIS are passive investors.  They actually do not act as responsible fund mangers. Hence it strongly shows that the DBP sold early. Temasek Holdings and the Government Investment Corporation of Singapore operates differently. They have expert fund managers and are transparent about their investments. Why were the owners of the funds at SSS and GSIS silent on this issue.  MB do you recognize your rights to be informed as a contributor to GSIS. 

    Why no outrage amongst the millions of contributors? Cognition!!!!!!

    So the market is narrow and very very shallow. Manny knows how to skirt rules on national patrimony already. (PLDT) Plus you have the foreign participation of up to 100% allowed in the mining sector through the technology assistance loop hole. 

    But you have to take control of a company with mining rights first. 

    That makes backroom deals possible. But that is the nature of  of the markets here in the Philippines. 

    The audacity of these guys is clear only to a few who recognize the weakness of market mechanism here. 

    It also shows up the almost impotence of the market regulator, the SEC whose primary purpose is the regulation of capital markets.  The role of the state is to make sure markets operate fairly and efficiently.  It is patently obvious that there are no functioning markets in the country. The simple definition of political economy is simply power relations and how they affect the workings of the so called market. 

    To the chattering classes it is known as palakasan… It is the way Philippine society has been organized…..It has become embedded in the culture.   

    Remove these silly nationalist provisions and allow for some oligarchic competition. 

    Just like our neighbors  who practice a form of competitive authoritarian system… 

    We have a weak leader presiding over a weak state with dystopian areas growing. ..

    • Manuelbuencamino

      Jag,

      1.”When MB mentioned the COA report he also did not recognize the importance of having the market informed that the DBP would like to unload and would supply buyer’s financing. ” 

      a) DBP was under no obligation to inform the market that it intended to unload its shares. To do so would drive the share price down. So that would be stupid of DBP.
      b) why would DBP announce that it would supply buyer’s financing? Did you expect the DBP to take out full page ads annoucing it would lend money to buy its shares? Absurd! I would assume that Ongpin or any other businessman has to convince DBP that it would make money by lending him money to buy his shares.

      2. “Ongpin could not have been the only one who knew that Pangilinan was on the lookout for bulk shares to take control of the board. ”

      You’re right he was not the only one who knew. Everybody knew!  Pangilinan made a public announcement. That’s one reason, in addition to the price of gold and copper, why the shares started to move up. 

      3. “Also the COA is not authorized to delve into the workings and operations of PHILEX.” 

      COA is authorized to look into the working and operations of government financial institutions like DBP, SSS and GSIS. 

      4.”The SSS and GSIS are passive investors.  They actually do not act as responsible fund mangers.”

      What do you mean? Neri of SSS sat on the Philex board. GSIS was on the Meralco board and even tried to take over from the Lopezes. That does not sound like passive investor to me. 

      5. “Why were the owners of the funds at SSS and GSIS silent on this issue.  MB do you recognize your rights to be informed as a contributor to GSIS. ” “Why no outrage amongst the millions of contributors? Cognition!!!!!!”

      Did the GSIS and SSS make money on Philex? Did they lose money? That is what concerns policy holders!

      So what was it that you were trying to say?

      • J_ag

        To your reply to point  1. a) When the
        government privatized Petron did they announce it or not? 

         

        Please note they sold initially 40% to Saudi Arabia since they long term
        contract with the same.   When the government decided to sell their 40%
        portion did they announce it or not????? When they sold off the 20% to the
        general public did they announce it or not?  

         

        On point 3 

         

        COA has no authority to look into the books of PHILEX!!!!!!!

         

        Government investors are on the board.  They are not involved
        in operations.

         

         Kindly look at the Chilean model wherein the state owns the
        largest copper mines and operates the same. The revenue goes directly to state
        coffers. Please note internal operations and data are confidential…

        If the
        State is a major bloc owner the national treasury which we all own should be
        informed of the potentials don’t you think.. Those idiots at the top should know
        this. That is what is known as national patrimony . Non-renewable resources
        that must be translated to long term public goods and human capital…

         

        http://opinion.inquirer.net/15761/%E2%80%98zero%E2%80%99-share-from-mining-wealth

        On your reply to no. 5. Trading or investing? 

        Why do policy holders in GSIS and SSS receive dividends? Are they mutual fund owners and can sell out? Are not both institutions pension funds? 

        Investing in equities must have a long term outlook. Most especially in the resource based sector. For emerging economies the state must play a large role… 

        Once again this is a battle of ideologies… Once again we are at the tail end in Asia since other countries have heavy state intervention in strategic sectors.

        Look at Indonesia and Malaysia and when you land in Jakarta or KL compare their infrastructure to ours. .All funded by their resource based industries wherein the State has a major role and revenue pours into their budget.  

          Long term sources of funding must be used for building up the capital capacities of the country and not used to dabble in trading profits when the time is ripe?  

        Most especially during a time of changing paradigms in the world of commodities. 
        The inclusion of a future market of over 2 billion people in the last 20 years have changed everything that has been happening since the beginning of time. So many people that are striving for a higher standard of living which translates to the surging demand for resources. 

        Why is that a big secret to most people who should know ?
        Add to that  the rapid destabilization of fiat currencies all over the world and what do you get? 

        http://www.ft.com/intl/cms/s/2/90effa18-faa3-11e0-8fe7-00144feab49a.html#axzz1bbXqYhEo

        The word capitalism has many different connotations to many people.  The context in which I use the term is a social format. Today the social format in which the globe is operating under is financial capitalism.  

        Money relations …. 

         

        • Manuelbuencamino

          Jag,

          !. Your reply to point  1 (When the government privatized Petron did they announce it or not?)  is irrelevant because there is no parallel between DBP unloading its holdings in Philex and the government privatizing Petron. You should be able to tell the difference between the two cases.

          2. Your counterpoint (COA has no authority to look into the books of PHILEX!!!!!!!) to my point #3 is no reply at all 

          I said COA has the authority to look in the books of government financial institutions like GSIS, DBP, and SSS.  I did not say it had the right to look at the books of Philex. Read point 3 again before you go apeshit with exclamation points. 

          3. Your reply to point 5 must be seen in the context of our previous exchange. You asked why no outrage? I replied because DBP made money…for the policy holders, DBP added money to the pension fund.  And you answer with a lot of verbiage but with no sense or connection whatsoever to my reply to your original question.

          WTF!!!!! Do you want to converse or do you just want to show off and lecture?

  • Can something comes out of nothing? No, ‘di ba? Where were those millions and millions that DBP and Ongpin earned from the transaction? From the stock market, right? If the stock market is a fish market, why did not the other fish vendors smell the stink?

    Sniff, sniff, something is indeed fishy here. 

    • Manuelbuencamino

      All that money came from Pangilinan. He bought the shares directly from Ongpin. The ordinary investor who buys and sells shares on the exchange was not involved in the transaction.

  • J_ag

    You smell the fish simply because when you leave fish out for long enough it starts to stink… 

    When I first heard about this I was stunned why no one reacted?

    At a time when the hard money types were projecting a $2,000 per ounce price of the shinny stuff and with the world economy facing a liquidity crunch funds were flowing into commodities.. Hence mining shares were in for a bull ride… 

    Then we hear that Ongpin had very little money out on the purchase with DBP the owner supplying a line of credit to the buyer to buy their own shares. 

    There is one rule in the definition of fair market value. Both buyer and seller must have make sure as much as possible full information that is available to the most number of people to insure the best possible price. This is where David and the board failed to do due diligence.  One of whom happened to be a so called financial economic analyst/maven Alex Magno. 

    This becomes even more important since this is a block sale of shares in a resource based corporation whose products are in a bull market.  

    Plus all the participants in the transaction have inside information of the company unavailable to anyone else. 

    Roberto Ongpin together with the Ocier group were the primary organizers of the Binondo Central Bank way back when.  My close buddy also was involved with an American company that sued him during the mid 80’s for using his powers than to blackmail the company.

    He helped organize the Kuok’s investments into this country under the debt buyback program.  The taxpayer footed most of the bill for the Shangrila Makati and the Edsa Shangrila Mall and Hotel in Mandaluyong. 

    Big money and political network… Taxpayer subsidized profits … 

    So what else is new.  

    In a country where knowledge of finance/macroeconomics is very low it becomes easy to fool almost everyone. 

    Wow he bought bulk shares on  a margin call….  

    • Anonymous

      Doy would call that  meritocracy….   intricate knowledge of finance/macroeconomics   and large balls willing to risk  huge losses had gold gone like happened with the Hunts and silver.

    • Manuelbuencamino

      Jag,

      “When I first heard about this I was stunned why no one reacted?”
      The COA reacted immediately. It looked into the transaction and reported out its findings. The COA’s findings are now the basis of the Senate inquiry.

      But I think you are missing the crux of the matter: Why didn’t Pangilinan buy the Philex shares directly from the DBP in the first place? Pangilinan was in the Philex board so he had to know about the holdings not only of DBP but also of GSIS and SSS.