When First Pacific’s helmsman took over at Philippine telecom PLDT, there were strong hopes that he could turn its fortunes around. Eighteen months later, many fundamental problems remain. But a shrewd focus on convergence capabilities may be about to pay off. Matthew Montagu-Pollock reports. 

On the seventh floor of Ramon Cojuangco Building, in Makati, the midnight oil is burning. Manny Pangilinan, CEO of PLDT and First Pacific’s founder, is still deep in work. Pangilinan is embroiled in perhaps the hardest challenge of his working career, turning around lumbering Philippine ex-monopoly Philippine Long Distance Telecommunications Co (PLDT). 

Pangilinan’s workaholic schedule is a novelty in Manila. First Pacific has a modern, Anglo-Saxon, hard-driving stock-option culture, a long way from the relaxed head office of predecessor Antonio ‘Tonyboy’ Cojuangco, with its large headcount, many chauffeurs and short hours. Yet so far Pangilinan has not convinced the market that his efforts have been worth it. PLDT’s stock still languishes below the P1,420 ($35) per share that First Pacific paid the Cojuangco family for its stake 18 months ago.

The name PLDT carries immense symbolism in the Philippines. In the early 1990s it was one of the country’s worst-run utilities. Obtaining a new telephone could involve an eight-year wait, and bribery was necessary to obtain a line. Planned investments were siphoned off by firms connected to the controlling family. Indeed, things were so bad that PLDT is etched in the Filipinos’ consciousness as a frustrating symbol of what was wrong with the Marcos era, and even in the succeeding administration of Aquino, little altered. 

When First Pacific opened negotiations in August 1998, Pangilinan knew he was not buying a well-run utility. PLDT had a massive billing problem: on average it takes PLDT customers 200 days to pay for their calls. Then there was also deregulation – the US Federal Communications Commission had mandated draconian cuts in international accounting and settlement rates, so PLDT would soon see its IDD revenue base, its largest revenue source, decimated. 

In addition it confronted an increasingly competitive market at home, facing several new entrants. Finally, there were problems with cellular subsidiary Piltel (now 57.6% owned by PLDT), which through cloning and billing problems was building huge losses. “It was an extremely inefficient telco,” says Rohit Sobti, regional telecom analyst at Salomon Smith Barney. “Even the most basic things were not obvious to previous management, issues like accounts receivable and the most basic structural issues.” In 1997 PLDT declared record profits – but the company was heading for trouble. 

One and a half years later, what has been achieved? Most significantly, the de facto absorption of SMART, First Pacific’s highly successful Philippine cellular company. In the largest M&A deal in Southeast Asia in 1999 – and the largest ever in the Philippines – PLDT has agreed to buy 100% of SMART. Simultaneously, Japan’s telecom giant NTT will increase its investment to 15% of the enlarged PLDT, by investing a further $386 million in PLDT. The deal is highly satisfactory for both parties. NTT achieves the enlargement of its network through its preferred route, a joint venture. PLDT achieves technical support from NTT, whose subsidiary NTT Docomo is global front-runner in the race to third generation cellular development. 

Since the merger, SMART claims to have surged ahead. Despite severe initial problems with customer acceptance of its new GSM system, a key success has been its yuppie-oriented ‘Buddy’ pre-paid scheme, launched in September, which was boosted when PLDT prevailed on President Estrada to lean on Globe to permit messaging interconnection. “In December alone for SMART, we had more than 100,000 subscriber take-up,” says a contented Napoleon ‘Polly’ Nazareno, CEO of both Piltel and SMART. “We are going at a blistering pace. We are first in mobile banking and other WAP [wireless application protocol] services. Our product innovation group has very exciting projects for the near future. We’ve garnered over 350,000 GSM subscribers in less than a year.” 

Important changes are taking place at PLDT. The buzzword is ‘convergence’. Convergence means that media which previously carried distinct content (TV, fixed line telephone, cable, cellular) will increasingly carry all contents, regardless of platform. PLDT’s core system is moving from ‘circuit’ to ‘packet’ systems. “Especially in data communication there are pauses,” explains George Lim, senior vice president for PLDT’s network development and provisioning group. “If you browse the net and sift through information, if you’re all the time tying up the network, that is uneconomical.” Today’s ‘packet’ systems make use of the ‘bunchiness’ of digital data, and – between bursts – allow lines to be used by other users. 

Over the next three years PLDT’s core network investment will be totally on the packet side, moving all data onto the packet network. “We now have less than 2 million [fixed line] customers,” says Lim. “If we move all data to the packet networks, we can carry 4 million voice customers on the traditional circuit switch network.” That means huge economies – PLDT need never again invest in circuit switching networks except for subscriber line equipment. Even spare parts will come from cannibalising existing lines. As a result, next year’s capex should be down to P10 billion, versus former management’s budget of P20 billion. 

PLDT is also moving rapidly to provide content. With its pension fund it has bought the Philippine’s second largest cable company, Home Cable. It has increased its stake in Internet provider Infocom, installing new management; in December it started offering high-speed broadband Internet to selected areas of Makati for P3,050 per month, including cable modem. PLDT also controls the satellite firm Mabuhay Philippines Satellite Corp, where it has also installed new management. And now PLDT is believed be locked in a contest with Ayala to buy GMA Television, which has a TV broadcasting business, Channel 7, plus AM and FM radio operations. 

“We have a delivery system, so that 70% to 80% of the time people will have to use our highway,” says Pangilinan. “But now we need cars! Now, we don’t care if it’s a Toyota or a Maserati using our highway, but we feel we can be partly a manufacturer, and we can build content. You have got to put something that moves on your cellular or PC or TV set.” With half an eye on Benpres’ ABS-CBN, he adds: “Nobody has a monopoly of content. But you do have to do your own. We have to move away from our traditional business, which one day will become extinct. The issues are very profound.” 

Convergence also means revamping the corporate structure so that marketing leads. “Especially to corporates, we’ll be able to offer a bundled service, saying: ‘We can offer you the best rates, on the best delivery platforms’,” says Pangilinan. “Traditional voice, we have it, cellular, we have it, data on cable, Internet on cable, satellite, we have it. Which telco in the Philippines has got that?” 

A key issue remains PLDT’s collection problem. In an experiment, PLDT is giving some fixed line debtors the option to pay for new calls in advance via a prepayment arrangement. But getting commercial customers to pay is a more complex problem. “You’ve got to understand the scale of the problem,” says Christopher Young, PLDT’s chief financial adviser. “Each month we bill between P4-5 billion pesos of new receivables.” The answer has been improvements in internal procedures and a complex new billing software. “Once the new software is up and running, we’ll see good reductions,” says Young. “We’ve already stabilised the position – but it has taken us 15 months to achieve.” 

Yet another major worry remains cellular firm Piltel. “The extent of the losses were much deeper than we had anticipated,” admits Pangilinan. These and other losses were recognised in write-offs in 1998, which dramatically slashed PLDT’s profit from P7,649 in 1997 million to P1,106 million in 1998. Provision for doubtful accounts rose by a stunning 566%, peaking at no less than P5,351 million. The whole financial community was shocked by the scale. 

Piltel is trying to come to an agreement with its creditors to restructure its $850 million debts. In October a memorandum of understanding was signed with its bank creditors, who are owed around $330 million. But Marubeni, which installed Piltel’s fixed lines in Mindanao, is demanding full payment of its $280 million. Could Piltel go bankrupt? “If after a period of time we fail to come to terms with all of the creditors, then we have to make a decision,” says Pangilinan. “There has to be a resolution, one way or the other. It can’t last forever. The big question is Marubeni, what they will do.” 

Even PLDT’s mega-deal with NTT could be threatened, because it included among its conditions a satisfactory resolution of Piltel’s debt problems. Absent an agreement with creditor Marubeni, could the deal unravel? “It could, on a doomsday basis, yes,” replies Pangilinan. “It could be delayed, certainly. They [NTT] have got to be satisfied about the effectiveness and viability of the restructuring.” Yet this is unlikely. “Everyone is committed to re-working the Piltel debt, with or without the help of Marubeni,” argues SG Securities director Robert Sassoon, who points out that the creditor banks have extended their deadline from January to March. 

Less key, but a disappointment all the same, has been PLDT’s failure to get government support for local call metering (some smaller Philippine telcoms already do meter). Popular opposition to metering is symbolised by a website, pltd.com, a zany cocktail of hip anti-PLDT humour and sombre anti-crony conspiracy theory. The site parodies the PLDT’s ‘Touching Lives’ logo as ‘Torturing Lives’. “The response to my site is just tremendous,” says Gerry Kaimo, the owner. “We came out and said: ‘Clearly for Cash’, instead of ‘Clearly for You’,” he laughs. “We rendered Pangilinan’s name as Money Pahingi Nga, which means ‘give me money’.” The site touches a deep vein of resentment of PLDT’s special position in the Philippines. “It is a consumer rights thing,” says Kaimo. “People here allow big business to do anything to them, and don’t have a right to complain about it.” PLDT has been upset enough to take pldt.com to the courts – so far unsuccessfully. 

Yet PLDT stands little chance of recapturing the sort of power to bully consumers it once had. Its rivals are daily growing market share. Last year, PLDT’s main cellular rival Globe captured the lion’s share of the upscale GSM market, zooming up from only 90,000 in the early part of 1998, to 650,000 subscribers as of September 1999. Says attorney Rodolfo Salalima, senior vice president at Globe: “Our average revenue per unit is the highest in the local industry, it compares favourably with Hong Kong and Singapore.” In November Globe announced a merger between Globe and Islacom, which operates in the Visayas. The resulting company will be the Philippines’ eighth largest, with a combined capitalisation of $1.8 billion. 

Arguably an even more ferocious competitor could be Benpres, the flagship of the Lopez Group. Benpres is gradually melding a powerful mix of leading companies involved in cable, media and telecoms and the Internet. Group properties include Sky Cable, the country’s largest cable operator, with a 43% share of the cable market; ABS-CBN, the country’s leading broadcaster, with more than a 50% market share in Metro Manila and 80% share in the provinces; and Bayantel, the 47%-owned fixed-line provider, which has one of the best digital networks in the country. Pulling it all together is Eugenio ‘Gaby’ Lopez III. Supported by a team of 25, he is quietly reshaping Benpres to position it at the leading edge of Internet development in the Philippines.

Pangilinan, in contrast, strikes one as a tired man after 18 months in Manila – so difficult is the working environment, so great are PLDT’s problems. Some even question whether his decision to invest so heavily in the Philippines was entirely rational (First Pacific now has 52% of its assets in the Philippines, in Metro Pacific and PLDT, 31% in Indonesia, largely in Indofood). As an émigré-made-good, was he over-influenced by the prospect of running his homeland’s largest company? 

And equally important, did he under-estimate the political problems? “It’s not so much that he had to pay [under the table] when he came in,” says one commentator. “But they keep coming back and asking for more. Pangilinan is not one of the gang round the President, he’s considered an outsider.” 

Certainly the numbers have been awful. Shocking 1998 results were followed by poor 1999 results. PLDT’s consolidated profits for the first quarter of 1999 fell by 55% against the corresponding period in the previous year, declined 64% in the second quarter and 63% in the third. For the year 1999, consolidated net income was P2.8 billion, in line with analysts’ generally gloomy forecasts.

A key issue over the next year will be SMART’s performance. “It is not a publicly listed company, so no one has seen the numbers,” says Anton Periquet, managing director of Deutsche Securities in Manila. “SMART began the 1999 with about 900,000 subscribers, and announced at year-end that they had hit 1 million. Their main rival Globe also celebrated their 1 millionth subscriber, but began the year with about 250,000. 

“So the momentum seems with Globe, at least for now. SMART made P400 million pre-tax in 1998, possibly less in 1999 with the depreciation expenses of their new GSM system. So they will have to make a hell of a lot of money to offset the dilution PLDT shareholders will suffer from the acquisition in 2000.”

Periquet believes the obsession with the convergence concept has clearly helped public acceptance, if not enthusiasm, for the acquisition. “Ultimately, though, the acquisition will have to deliver the earnings to justify the price paid. And while I believe that management is doing all it can to make things work, expectations are just too high,” he says.

So can Pangilinan turn the company round? He does have a long track record of success. It’s hard to locate a failure since Pangilinan created First Pacific, amid great scepticism, back in 1981. And it’s significant that a growing number of analysts have been upgrading their recommendations. 

One of the swelling band of PLDT enthusiasts is Merrill Lynch’s Ray Ricafort. “Allocation of assets is the key factor,” he says. “In the last few months, they have not put capacity in any place where they feel that demand is not there. Productivity has dramatically improved, because of trying to match the assets with demand. That is something which new management has put its finger on. They have improved cash flow dramatically. This is a company whose profit has fallen dramatically, but whose cash flow has gone up by about 69% in the first nine months of the year – they are actually now cash-positive on operations.” 

Another supporter is Tim Storey, regional telecom analyst at Goldman Sachs. “I think their strategy makes sense,” he says. “What is unique about PLDT in the emerging market context is that they understand where the developed world is taking the telecoms business, and they are applying it to a developing world context. They are spending their money wisely, and are putting together a very dominant platform.”

Adds Ricafort: “[Pangilinan] saw that he should get all the different delivery formats: cable, wireless, wireline. In the US you have ATT betting on cable, and MCI-Sprint betting on wireless – and PLDT is betting on both! They lead both segments. In cable they are the best player, and now they are also the biggest player in wireless. All of these things have happened in just over a year.”

Of the top 10 foreign brokers in Manila, four have had upgrades since Pangilinan took over: Merrill Lynch, ABN Amro, Paribas Asia Equity and WI Carr (four other brokers had buys on PLDT even before First Pacific took over, SG, Warburg Dillon Read, CLSA and ING Barings, and two have sells, Deutsche Securities and Jardine Fleming Exchange Capital). Says Andrew Lo, regional telecom analyst at Warburg Dillon Read: “The light at the end of the tunnel is NTT coming in with some more cash, hopefully by the end of March. And the acquisition of SMART.”

But the market’s patience will not last forever, says Karen Ang at Salomon Smith Barney. “I think the market has forgiven PLDT for 1999, they are really focusing on 2000. But if the improvement does not come through, they are going to be very disappointed with PLDT.”

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