A battle for control of the country's biggest electricity distributor is brewing in the run up to the May 27 annual stockholders meeting of Manila Electric Co. (Meralco).

The contending parties are the pension fund Government Service Insurance System (GSIS), which leads the pack of government-owned corporations and government financial institutions that now have four seats in the 11-man board, and the legacy owners, the Lopez family, whose aggregate stake allows them five seats in the board.

Major changes in the board composition, which started early this year when the national government unloaded its stake to GSIS, has rocked what was more or less a comfortable co-existence between the two major blocs in the past two decades. The recent tiffs between the two, if not settled before the annual stockholders meeting in May, will inevitably result in a proxy fight.

The two groups each have about one-third of the total company shares. In a proxy fight, the battlefield is the remaining shareholdings, about 36 percent, which public investors hold.

The disagreements apparently boil down to personality differences. Winston Garcia, GSIS president, has irritated the Lopezes no end by his demand for information on how the company is run, from audited financial statements to commercial transactions. So far, Garcia has not established any corporate misdemeanor in Meralco.

"I want a change in management and I’m after transparency," Garcia told us in a telephone interview. "My patience has run out, and it’s about time to come out and say that the Meralco management is not being transparent."

A shareholder from Meralco, who requested not to be identified, said that "whatever explanation they give someone who is witch-hunting will not be satisfied."

In a letter responding to one of Garcia’s requests for information, a peeved Meralco president, Jesus Francisco, wrote, "Your requests need time…I have to remain focused on the operations of the company as a public utility."

To be sure, there are efforts from third parties to patch up the differences between Garcia and the Lopez family members. How these meetings will address and settle the issues between the two groups will determine if sparks will fly during and in the run up to the annual stockholders meeting in May 27.

Two major blocs

How the two groups reached a situation where they both have to vigorously defend their position has been both deliberate and clever.

The Lopezes have lost Meralco before. Together with other assets, Meralco had to be surrendered to former president and family nemesis, Ferdinand Marcos, during the martial law years in the seventies.

In the succeeding Aquino government, they reclaimed Meralco and other assets, including broadcast company, ABS-CBN, which is the parent of ABS-CBN Interactive that runs this Web site.

Just last year, when Meralco's Spanish partner Union Fenosa Internacional SA divested its shareholdings in the company, the Lopezes' power and infrastructure conglomerate, First Philippine Holdings Corp (FPHC) forked out more than P2 billion to acquire Fenosa's stake in the joint venture company, First Philippine Union Fenosa, which owned 22.7 percent of Meralco.

The year before that, FPHC already acquired Meralco Pension Fund's 6.6 percent stake in the utility. Through FPHC, the Lopezes were effectively the single biggest shareholder in Meralco with 33.4 percent stake.

It was a strategic move. It cemented their control of the utility ahead of a planned divestment by the government, which, as of end-2007, had about 20 percent stake in Meralco.

GSIS currently holds about 23 percent. With other government entities like Philhealth, Landbank, Social Security System, and Pag-Ibig Fund's aggregate to 10 percent, the government now has a total of 33 percent stake in Meralco. That's enough to match FPHC's.

In January 2008, the national government needed to raise additional revenue to compensate for the shortfalls in tax collections and meet its promise of balanced budget this year. Of the 20 percent national government and government financial institution's (GFI) stake in Meralco, about 10 percent stake was for sale.

In a surprise move, GSIS, which initially had about eight percent stake in Meralco, bought the national government's 10 percent stake and went on to steadily increase its shareholdings through the stock market.

The pension fund is awash in cash. It just disposed billions of pesos worth of shares in blue chips San Miguel Corporation, Philippine Long Distance Corporation and Ayala Corporation in 2007.

Personality differences

At the Meralco board, relations between Garcia and the Lopezes have been icy from the start. (Manolo Lopez chairs the board. Other members include Washington Sycip and Cesar Virata.)

Garcia started to sit on the board in March 2008, after GSIS bought the national government stake and increased its shares.

Garcia's strong, sometimes abrasive, personality had already rubbed the Lopez representatives in the Meralco board the wrong way when he used to sit on the board sometime in 2003. At that time, he stayed on the board only for one year because he was not re-nominated by the government.

Those familiar with the goings-on in the board then told abs-cbnnews.com/Newsbreak in confidence that Garcia's brash suggestions on how to handle Meralco's P30-billion customer refund issue did not sit well with the others.

Now, the two camps face off again. Those privy to Garcia's sentiments towards the other directors in the board told us that Garcia was put off by what he thinks are attempts to brush him aside when he raises questions about the financial health and commercial practices of the company. Slighted, Garcia then went on to try and learn more about various aspects of the company's activities and contracts, sources said.

"I’m a major shareholder and they don’t listen to me," he said. "I have to beg them, cajole them, and threaten them."

Correspondences between GSIS and Meralco document these. Since March, when Garcia started attending the Meralco board meetings, there were at least 18 letters between the two groups. These letters were shown to abs-cbnnews.com/Newsbreak.

Corporate governance

The letters show an exasperated Garcia trying to have access to audited financial statements before a March board meeting (it was available to the board members only during the meeting itself), to requests for prompt responses to his questions about commercial transactions of Meralco. His and the other GSIS official's letters to Meralco were punctuated with "respond in 72 hours" and "state the reason (for the delay in responding back)." He described the Meralco executives as "defensive and evasive" in their replies to his questions.

In Garcia's letters, he hints of potential self-dealing transactions allowed by Meralco board and management. He singles out—and repeatedly requests documents on and explanations for—the independent power purchase (IPP) contracts with Meralco's sister companies that generate and supply electricity, which Meralco then distributes to its customers.

Meralco's president, Jesus Francisco, wrote back to GSIS that the Energy Regulatory Commission has allowed Meralco to source some of its power supply from its affiliates that generate power.

In the heavily regulated power industry, there should be independence between generation and transmission activities, and between transmission and distribution businesses.

A letter from GSIS was also sent to SGV & Co., the external auditor of Meralco. There were questions on the independence of Meralco board member, Washington Sycip, since he founded SGV. The latter replied that Sycip is no longer connected with the auditing firm, nor does he sit on the audit committee of Meralco.

To the Lopezes, Garcia is being a nuisance, a source familiar with the case said. "His style is creating havoc in the board. He wants to be important all the time."

Similar to Equitable PCI-Bank

Corporate governance was also Garcia's pitch when he was in the board of Equitable-PCI Bank, which has since been renamed to Banco De Oro after the former was bought out by the Sy family of the SM malls fame. Garcia and others in the Equitable-PCI board harped on how the Gos reportedly engaged in questionable transactions that benefited other Go-controlled companies.

A battle for board control also ensued as two Chinese families, the Sys of Banco de Oro, and the Gos of Equitable-PCI Bank, raced to get more votes also through a proxy fight. Annual stockholders meetings in 2005 and 2006 were dramatic as both families courted swing votes and public sentiment.

Incidentally, Garcia and another Equitable-PCI minority shareholder, Martin Romualdez, were the swing votes.

While the personality differences and the drama are almost similar in the boardroom goings-on at Meralco and Equitable-PCI, there is no minority shareholder that could play the swing-vote role in Meralco. The proxy votes of thousands of public investors of the listed and one of the most liquid utility stocks in the local equity market will be up for grabs.

Garcia’s strategy

But the Lopezes are no stranger to this. In the Equitable-PCI Bank boardroom drama, FPHC moved to stop Martin Romualdez from voting the shares after Newsbreak reported that Romualdez's company withdrew the dividends earned from the bank shares, which were allegedly ill gotten during Marcos's reign. The Lopezes have been contesting these shares in the courts as an intervenor to the government's recovery case. These bank shares are particularly emotional to the Lopezes because this is the only one that remains unresolved from the many businesses that have allegedly been taken from them during martial law.

In other words, the Lopezes closely watched the Equitable-PCI boardroom happenings then. Alongside with their pending court case against the Romualdezes, they kept a watchful eye on how Garcia was able to shore up his selling price for GSIS's Equitable-PCI Bank shares to the Sys after the latter dislodged the Gos in the bank's board. The Sys wanted to merge Banco de Oro and Equitable-PCI to realize synergies, but Garcia blocked it.

At about the same time, Garcia declared that he had buyers interested in GSIS's 12 percent stake in the bank. The secret buyers never surfaced, but the Sys gave in and bought GSIS and shares of others who were willing to sell at P92 per share, the price that Garcia wanted.

That's more than double the Sys' offer price of P43 three years prior.

Sources said the Lopezes are assuming that Garcia is employing the same strategy in Meralco now. After all, in January, GSIS bought the national government's 10 percent for only P8.9 billion, lower than the expected P11 billion proceeds. Each Meralco share was purchased for about P80.91, still a premium over the market price of P70 at that time. Obviously, if GSIS plans to make a quick turnaround from this transaction, a solid 33 percent bloc of shares will command more premium.

Asked if he plans to do the same in Meralco, Garcia replied, "My obligation is to get fair returns for our investment." (abs-cbnNEWS.com/Newsbreak)

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