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This spreadsheet supports STUDENT analysis of the case,

"The Acquisition of Meralco"


Question 1: Describe the interests of each group of companies. Why do buyers want to buy and why does
seller want to sell? Comment on ownership interest of each group as of late 2009. What are the goals of
MVP in buying Meralco? (Qualitative answer. Presenting group, if any, should be prepared to show
diagrams)
Refer to Snipshot

Question 2: Perform SWOT analysis of Meralco. What makes this company an attractive acquisition target?

Question 3: Calculate Meralco WACC based on Exhibit 6. You may use a market risk premium of 6%. Use
the target capital structure indicated on this Exhibit. You may also assume that the BV of debt in 2009 is the
same as 2008. Prices and instructions are on your student spreadsheet. Utilize covariance formula in the
student spreadsheet. The PBR scheme is intended to regulate the returns of Meralco so we will go with the
target capital structure (for now let's assume the government will find a way to claim back any excesses
over this target). For the risk free rate, apply the appropriate formula on Exhibit 6 to the Exhibit 9 data.

7%
Question 4: What are MVP's alternative courses of action? Define tag-along and right of first refusal.
A tag along right will entitle the minority shareholder to participate in the sale at the same time for the
same price for the shares. The minority shareholder then 'tags along' with the majority shareholder's sale.
Tag along rights are usually worded to state that if the tag along procedures aren't followed then any
attempt to buy shares in the company is invalid and won't be registered.

Tag along clauses are designed to protect the minority shareholders from being left behind when a majority
shareholder decides to sell their shares. If a minority shareholder held 10% of the shares in a company, it
would be difficult to sell as most buyers will want 100% of a company. This puts minority shareholders a
risk of being forced to sell their shares at a price which is substantially much lower or has no relationship to
the actual value of the company. Without tag along rights, minority shareholders may find that they hold
unsalable or devalued shares.

Right of first refusal is a contractual right, but not obligation, to enter into a business transaction with a
person or company before anyone else can. If the entity with the right of first refusal declines to enter into a
transaction, the owner of the asset who offered the right is free to open the bidding up to other interested
parties.

Question 5: Run multiples valuation of Meralco (EV/Revenue, EV/EBITDA, EV/EBIT). Compare the
value of Meralco per share to the purchase price being contemplated in late 2009.

Question 6: Run DCF valuation of Meralco until 2028. How might you estimate synergy value in your
DCF calculation? Is the synergy value consistent with the purchase price premium over the current market
price of Php 186?
Refer to Valuation tab.

Question 7: What would you do if you were MVP (considering the interests of the seller)? If you decide to
buy more Meralco shares, how much would you bid per share if you were MVP and why? What would you
do about the tender offer issue?
buy and why does
t are the goals of
ared to show

ve acquisition target?

premium of 6%. Use


f debt in 2009 is the
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we will go with the
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Exhibit 9 data.

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me time for the
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Exhibit 5
Manila Electric Company
Parent Company Balance Sheets
As of December 31

2008 2007 2006


(Amounts in Millions)
ASSETS
Noncurrent Assets
Utility plant and others - net 93,970 92,290 90,517
Construction in progress 3,704 2,811 2,909
Investments in subsidiaries, associates
and joint venture 2,238 1,776 1,443
Investment properties – net 898 902 907
Deferred pass-through fuel costs 3,792 4,896 7,063
Deferred income tax assets 8,469 6,106 6,090
Other noncurrent assets 9,097 15,449 12,460
Total Noncurrent Assets 122,168 124,230 121,389
Current Assets
Cash and cash equivalents 4,023 4,062 5,866
Trade and other receivables – net 36,653 33,211 32,883
Materials and supplies 1,525 1,491 951
Other current assets 996 1,361 3,209
Total Current Assets 43,197 40,125 42,909
165,365 164,355 164,298

EQUITY AND LIABILITIES


Equity
Common stock 11,038 11,033 9,988
Capital in excess of par value 2,932 2,931 2,918
Employee share-based payment plan 268 152 79
Unrealized fair value gains on available-
for-sale investments 57 57 39
Appraisal increase in utility plant and
others 19,765 20,131 20,545
Unappropriated retained earnings 11,636 14,299 10,285
Appropriated retained earnings 4,198 200 1,200
Total Equity 49,894 48,803 45,054
Noncurrent Liabilities
Interest-bearing loans and other
borrowings - net of current portion 11,381 13,028 14,142
Customers’ deposits - net of current
portion 23,321 21,300 19,132
Provisions 5,743 1,396 1,724
Customers’ refund - net of current
portion 2,680 7,866 9,926
Pension liability 11,859 11,290 10,775
Deferred income tax liabilities 13,099 13,825 14,497
Liability arising from deferred pass-
through fuel costs -
net of current portion – 692 2,788
Currency Exchange Rate Adjustment
(CERA) I and II over recoveries,
including carrying charges - net of
current portion 3,008 – –
Other noncurrent 627 485 518
Total Noncurrent Liabilities 71,718 69,882 73,502
Current Liabilities
Notes payable 9,770 10,500 –
Trade and other payables 22,225 28,752 38,963
Customers’ refund - current portion 7,925 4,904 4,432
Interest-bearing loans and other
borrowings - current portion 1,636 1,514 769
Income tax payable 2,197 – 1,578
Total Current Liabilities 43,753 45,670 45,742
Total Liabilities 115,471 115,552 119,244
165,365 164,355 164,298

Source: Meralco Audited Parent Company Financial Statements


2005
llions)

88,644
3,799

966
842
7,857

7,273
109,381

13,722
29,302
1,116
425
44,565
153,946

9,985
2,918
56

37

20,968
(1,511)
200
32,653

18,879

18,173
16,997

11,736
9,494
4,000

4,121

1,232
84,632


30,052
3,787

2,584
238
36,661
121,293
153,946
Exhibit 6
Manila Electric Company
Parent Company Statements of Income
Years Ended December 31

2008 2007 2006 2005 2004


(Amounts in Millions, Except Per Share Data)
REVENUES
Sale of electricity 185,985 195,249 185,832 171,017 147,370
Lease income 323 364 243 398 267
186,308 195,613 186,075 171,415 147,637
EXPENSES (INCOME)
Purchased power 155,971 171,852 160,480 148,865 124,601
Operations and maintenance 13,243 12,678 10,504 10,210 8,742
Provision for (recovery of) probable
losses on disallowed receivables and
refund 6,617 (646) 215 231 (215)
Depreciation and amortization 4,272 4,404 4,167 4,559 4,548
Interest and other financial expenses 3,007 2,866 4,963 4,008 3,766
Interest and other income (1,346) (1,993) (2,692) (2,003) (822)
Present value impact on customers’
refund 846 1,096 1,512 1,726 –
Foreign exchange losses (gains) - net (433) 305 1,901 2,842 1,352
Provision for (recovery of) probable
losses from tax assessments and legal
claims - net 318 (328) 452 – 9,824
Taxes other than income tax 112 143 553 138 576
CERA II revenue (1,381) (2,934) (1,330)
182,607 190,377 180,674 167,642 151,042
Reversal of probable losses related to
unbundling rate case – – 15,725 (5,901) –
INCOME (LOSS) BEFORE INCOME
TAX 3,701 5,236 21,126 (2,128) (3,405)
PROVISION FOR (BENEFIT FROM)
INCOME TAX
Current 4,704 2,319 3,340 2,549 (1,379)
Deferred (3,089) (689) 4,407 (4,266)
1,615 1,630 7,747 (1,717)
NET INCOME 2,086 3,606 13,379 (411) (2,026)
Earnings Per Share
Basic 1.8901 3.4014 13.4039 (0.4118) (2.0110)

Diluted 1.8866 3.3871 13.3614 (0.4118) –

Source: Meralco Audited Parent Company Financial Statements


(in million pesos) ###
Annual Revenue Requirement - distribution* 36,566
Lease income** 334
Total income 36,900
Operating and Maintenance Expenditures Forecast* 12,203
License fees, levies, duties and other taxes expenditures forecast* 263
Additional non-distribution expenses* 1,492
Depreciation* 4,848
Total expense 18,806
Income before tax 18,094
Working Capital Allowance (increase)* 14
Capital Expenditure* 7,183

*From 2010 to 2011, obtained from Final Determination for the Second Regulatory Period; From 2012 to 2014, amounts are casewriter's esti
**Casewriter's estimates
Exhibit 11
Financial Forecast

### ### ### ###


38,122 41,745 45,712 50,056
346 358 370 383
38,468 42,102 46,082 50,439
12,740 13,951 15,277 16,728
231 253 277 303
1,585 1,640 1,698 1,757
5,545 6,072 6,649 7,281
20,101 21,916 23,900 26,070
18,366 20,186 22,182 24,369
16 36 40 44
7,391 8,094 8,863 9,705

om 2012 to 2014, amounts are casewriter's estimates


Exhibit 12

Daily US Treasury Real Yield Curve Rates


AS OF 6/30/2009

Maturity Real Yield*


5 yr 1.20%
7 yr 1.46%
10 yr 1.78% risk-free rate
*No adjustment for inflation required

Source: http://www.treasury.gov
WACC 7%

Assumptions
Debt 22,787 Exhibit 5: interest-bearing only
Equity 49,894 Exhibit 5: total equity
Total Value 72,681

Cost of Equity 6%
Exhibit 7: Risk-free rate estimated for the
Risk-free rate 1.87% Philippines using an indirect method
Beta 0.9533207843 Beta Tab: Covariance formula
Unlevered Beta 0.6061577241
Beta from ERC 1.25
Market Risk Premium 6% Given

Cost of Debt 9%
Interest expense 3007 Exhibit 6: interest expenses for 2008
Total interest-bearing debt 22,787 Exhibit 5: interest-bearing only
Interest rate 13%
Tax Rate 30%
WACC Calculation Risk-free rate
Weight (TaCost WACC
Cost of Debt 45% 9% 4% rf USA
Cost of Equity 55% 6% 3% CPI USA
100% 7% CPI PH
CRP

WACC Calculation - from ERC RFR


Weight Cost WACC
Cost of Debt 45% 10% 5%
Cost of Equity 55% 15% 8% Cost of Debt
100% 13%
1.87% 10-year US treasury
2.69%
3.50%
2.70%

5.44571735319894%
### ### ###
Earnings before interest and taxes (EBIT) 18,094 18,366 20,186
Depreciation 4,848 5,545 6,072
Net Change in Working Capital (14) (16) (36)
Capital Expenditures (7,183) (7,391) (8,094)
Free Cash Flow 15,745 16,504 18,128
Terminal Value 0 0 0
Total Free Cash Flow 15,745 16,504 18,128
Time Value of Money 0.92 0.84 0.77
Discounted Cash Flow 14,445 13,891 13,998

Enterprise value 515,516


Less net debt 22,787 Assumed no excess cash
Equity value 492,729
Number of shares 1,115
Value per share (DCF) 442
Current price per share 139
Premium 303

Valuation Multiples
As of June 2009 2010 Forecast
Forecasted Revenue 190,367 36,566
Forecasted EBITDA 11,659 22,942
Forecasted EBIT 7,077 18,094

EV/Revenue EV/EBITDA EV/EBIT


Aboitiz Power Corp. (PHP) 3.12 8.44 9.71
Energy Development Corporation (PHP) 4.13 9.17 9.86
Average 3.62 8.80 9.79
Enterprise Value of Meralco 132,545 321,946 357,917
Interest bearing debt 22,787 22,787 22,787
Equity Value 109,758 299,159 335,130
No. of Shares 1,115 1,115 1,115
Share Price 98 268 301

All Distribution Companies EV/Revenue EV/EBITDA EV/EBIT


Aboitiz Power Corp. (PHP) 3 8 10
Energy Development Corporation (PHP) 4 9 10
Compañía General de Electricidad S.A. (Chi 2 11 17
Hokkaido Electric Power Co. Inc. (JPY) 2 15 NM
Shikoku Electric Power Co. Inc. (JPY) 2 11 31
Hokuriku Electric Power Company (JPY) 3 9 32
The Tata Power Company Limited*** (INR) 2 11 13
Average 3 11 19
Enterprise Value of Meralco 93,690 243,484 339,049
Interest bearing debt 22,787 22,787 22,787
Equity Value 70,903 220,697 316,262
No. of Shares 1,115 1,115 1,115
Share Price 64 198 284
Assumptions
### ### WACC ###
22,182 24,369 Growth Rate ###
6,649 7,281 Inflation Rate 3.80%
(40) (44) Cap Rate 3.39% used inflation as it is indicated
(8,863) (9,705) Terminal CF 23,171.86
19,928 21,902
0 684,424
19,928 706,326
0.71 0.65
14,118 459,063
used inflation as it is indicated in the case that growth rate should be a lower rate

Summary:

- All projected share prices from the valuation


multiples method are below the 300/share
contemplated by MVP Group in 2009.
- Premium maybe attributed to the future synergy
of the project, which was not captured by this
model.
In Millions, Except Per Share Data

Company Name Enterprise Value** Revenue*


MERALCO (PHP) 172,833 190,367
Aboitiz Power Corp. (PHP) 42,409 13,597
Compañía General de Electricidad S.A. (Chilean Peso) 3,150,731 1,883,032
Energy Development Corporation (PHP) 89,080 21,565
Hokkaido Electric Power Co. Inc. (JPY) 1,224,973 588,282
Hokuriku Electric Power Company (JPY) 1,316,687 525,647
Petron Corporation (PHP) 94,256 213,032
Philippine Long Distance Telephone Co (PHP) 479,694 148,056
Shikoku Electric Power Co. Inc. (JPY) 1,340,237 613,555
The Tata Power Company Limited*** (INR) 394,173 175,875

**As of June 30, 2009


***As of March 31, 2009

Source: Casewriter’s computation based on data obtained from www.capitaliq.com


Note: Student may make use of hidden values in columns B to E.
EV = Enterprise Value
EBITDA = Earnings before Interest, Taxes, Depreciation, and Amortization
EBIT = Earnings before Interest and Taxes
EPS = Earnings per Share

Aboitiz Power Corporation engages in power generation, distribution, and retail operations, as well as provides power services in the Philip
18 cities and municipalities in central Luzon, Visayas, and Mindanao with an aggregate land area of approximately 5,305 square kilometers
in Cebu, the Philippines. Aboitiz Power Corporation is a subsidiary of Aboitiz Equity Ventures, Inc.

Compañía General de Electricidad S.A. engages in the generation, transmission, and distribution of electricity. The company was founded i

Energy Development Corporation engages in the exploration, development, and operation of geothermal energy projects in the Philippines

Hokkaido Electric Power Co., Inc. engages in the transmission and distribution of electricity in Hokkaido, Japan. The company was founded

Hokuriku Electric Power Company supplies electricity through integrated power generation, transmission, and distribution systems in Japan

Petron Corporation is an oil refining and marketing company, processes crude oil into a range of petroleum products. The company was fou
Philippine Long Distance Telephone Company provides telecommunication services in the Philippines. The company was founded in 1928 an

Shikoku Electric Power Company, Incorporated is an electric utility, engages in the generation, transmission, distribution, and sale of electr

The Tata Power Company Limited engages in the generation, transmission, distribution, and trade of electricity primarily in India. The com

Source: www.capitaliq.com
Exhibit 13
Trading Multiples on Meralco and Comparable Companies
As of June 2009

EBITDA* EBIT* EV/Revenue EV/EBITDA EV/EBIT Share Price** Diluted EPS**


11,659 7,077 0.91 14.82 24.42 139.0 2.99
5,027 4,365 3.12 8.44 9.71 5.7 0.53
276,822 184,816 1.67 11.38 17.05 3,630.0 420.19
9,711 9,033 4.13 9.17 9.86 3.2 0.08
83,597 NM 2.08 14.65 NM 1,807.0 NM

142,926 41,215 2.50 9.21 31.95 2,205.0 93.93


421 NM 0.44 223.67 NM 5.4 NM

89,532 64,028 3.24 5.36 7.49 2,395.0 184.88


124,547 43,406 2.18 10.76 30.88 2,880.0 98.79
36,925 30,360 2.24 10.67 12.98 115.0 5.51

ell as provides power services in the Philippines. It has interests in 7 distribution utilities that supply electricity to franchise areas covering approximate
of approximately 5,305 square kilometers, as well as serves approximately 740,833 customers. The company was founded in 1998 and is headquarter

of electricity. The company was founded in 1905 and is based in Santiago, Chile.

thermal energy projects in the Philippines. The company was founded in 1976 and is headquartered in Pasig City, the Philippines.

kkaido, Japan. The company was founded in 1951 and is headquartered in Sapporo, Japan.

mission, and distribution systems in Japan. The company was founded in 1951 and is headquartered in Toyama, Japan.

petroleum products. The company was founded in 1933 and is based in the Philippines.
nes. The company was founded in 1928 and is headquartered in Makati City, the Philippines.

ansmission, distribution, and sale of electricity in Japan. The company was founded in 1951 and is headquartered in Kagawa, Japan.

e of electricity primarily in India. The company was founded in 1915 and is based in Mumbai, India.
Price/DEPS
46.43
10.86
8.64
42.13
NM
23.48
NM
12.95
29.15
20.90

reas covering approximately


n 1998 and is headquartered

nes.
Japan.
Note: This table presents the historical stock prices of Meralco (MER) versus the Philippine Stock Exchange Index (PSEi)

Pricing Date PSEi MER


Jun-29-2007 3,660.86 102.73
Jul-31-2007 3,501.20 -4.36% 90.45 -11.95%
Aug-31-2007 3,365.29 -3.88% 93.64 3.53%
Sep-28-2007 3,572.90 6.17% 83.00 -11.36%
Oct-31-2007 3,758.97 5.21% 82.50 -0.60%
Nov-30-2007 3,578.55 -4.80% 72.50 -12.12%
Dec-31-2007 3,621.62 1.20% 82.50 13.79%
Jan-31-2008 3,266.00 -9.82% 80.00 -3.03%
Feb-29-2008 3,129.99 -4.16% 79.00 -1.25%
Mar-31-2008 2,984.67 -4.64% 80.00 1.27%
Apr-30-2008 2,749.77 -7.87% 81.00 1.25%
May-30-2008 2,827.44 2.82% 61.50 -24.07%
Jun-30-2008 2,459.98 -13.00% 38.50 -37.40%
Jul-31-2008 2,577.10 4.76% 59.50 54.55%
Aug-29-2008 2,688.09 4.31% 56.00 -5.88%
Sep-30-2008 2,569.65 -4.41% 59.00 5.36%
Oct-31-2008 1,951.09 -24.07% 58.50 -0.85%
Nov-28-2008 1,971.57 1.05% 58.00 -0.85%
Dec-31-2008 1,872.85 -5.01% 59.50 2.59%
Jan-30-2009 1,825.09 -2.55% 59.50 0.00%
Feb-27-2009 1,872.22 2.58% 90.00 51.26%
Mar-31-2009 1,986.22 6.09% 87.00 -3.33%
Apr-30-2009 2,103.50 5.90% 91.50 5.17%
May-29-2009 2,389.31 13.59% 115.00 25.68%
Jun-30-2009 2,437.99 2.04% 139.00 20.87%

Count (n) 25.00 25.00


Mean -1.37% 3.02%
Variance 0.006056823 0.040008
Std Dev 0.077825592 0.200019
Covariance 0.005774095
R-squared 0.137587502

Beta 0.953320784
hange Index (PSEi)
Copy and paste this into your internet browser for a tutorial on beta calculation:
faculty.babson.edu/academic/Beta/CalculateBeta.htm

OR

You can refer to the instructions below for the beta calculation.

Beta Calculation

Copy both of the closing price columns into a new spreadsheet. They should be in order from newest to oldest from top to
bottom, respectively. To obtain the correct format for calculation we must convert these prices into return percentages. To do
this we just take the price from today minus the price from yesterday and divide the answer by the price of yesterday. The
result is the percentage change. Below is a picture showing this in Excel. Figure 1 is of the formulas and Figure 2 is of the
result.

Figure 1: Formulas

Figure 2: Results
The calculation of beta through regression is simply the covariance of the two arrays divided by the variance of the array of
the index. The formula is shown below.

Beta = COVAR (E2:E99,D2:D99)/VAR(D2:D99)

One advantage we discussed earlier is the ability to gauge the reliability of your beta. This is done by calculating the r-squared.
From here we input the two arrays containing the percentage changes. Below is this formula in Excel.

R-Squared = RSQ(D2:D99,E2:E99)

Source: www.investopedia.com
newest to oldest from top to
into return percentages. To do
y the price of yesterday. The
ulas and Figure 2 is of the
y the variance of the array of

one by calculating the r-squared.


n Excel.