Globe Telecom talks growth, liquidity and convertibles

CFO Delfin C Gonzalez Jr talks about the company''s challenges managing growth, maintaining capital markets access and the possibility of a convertible bond.
Globe Telecom is the Philippines leading digital cellular operator and has been frequently applauded for its innovative strategy and push for profitability above market share. One of the fastest growing companies in the Philippines, Globe also stood out last year as the only one able to raise international equity. In October, Morgan Stanley structured a $100 million PDR issue for the company that gave foreign institutions their first real access to the stock. CFO Delfin C Gonzalez Jr talks to FinanceAsia about the company's plans to broaden access further.

FA: You haven't been CFO of Globe for very long. Did you have any experience of the telecoms sector before you joined?

Gonzalez: Other than using a telephone myself, no, none at all. The industry was completely new to me and the most surprising thing has been the phenomenal growth rates. Before Globe, I was at San Miguel for 24 years and if beer sales went up 6% a year, it used to be a cause for celebration. I came to Globe in November 2000. At the beginning of last year, we had 900,000 subscribers. By the end of the year it was up to 2.5 million and by the end of the first quarter of this year, we were up another 20% to 3 million. Our real challenge is to make sure that we can keep up with these subscriber growth rates and for me personally, to make sure that Globe has full and immediate access to the capital markets to fund our expansion programme to accommodate them.

One of the main stumbling blocks has been your ownership structure. Has this now been resolved?

Yes, finally. Now the Islacom acquisition has been completed, we are able to re-open foreign ownership to institutional investors again. Before this, Singapore Telecommunications and a few foreign investors had almost entirely filled the 40% limit. Another problem was that those foreign institutional investors which had bought our stock tended to lock it away, so overall liquidity was very bad. Now, as a result of the capital restructuring, about 20% is open to foreign investors.

How has the capital structure been re-configured?

Singapore Telecom, Deutsche Telekom and Ayala all hold ownership of a Philippines holding company, Asiacom. Because Ayala holds 60% of this company, it's classified as a local company. Asiacom now owns 60% of Globe through preference shares, opening up the common shares to foreign institutions. The three partners each hold 26% of the common shares and the rest is in free float.

What impact should these changes have on the stock?

Well, we really hope liquidity will increase dramatically. Making our stock trading more vibrant is the major focus of the year. Now that the capital structure has been altered, PDR holders can also convert into common shares and we're hoping the entire pool will collapse into the common shares and increase liquidity further.

How big's the PDR pool?

Our total market cap is about $1.4 billion and the PDRs represent about $100 million, so just under 10%. The two typically tend to trade at parity to one another, so collapsing the PDRs into the common shares shouldn't be too difficult. We're also committed to making sure that the public float reaches 30% over time. At the moment it's about 20%.

How has the overall illiquidity of the Philippines market affected you?

We feel quite strongly that we've been held back and all our relationship bankers keep telling us that we have a good equity story to tell. Unfortunately, just like everyone else, we've been affected by general macro-economic factors in the Philippines.

What are your capex plans this year and how do you intend to fund them?

We've just completed the financing for phase 8A of our network expansion to keep quality of the service high. This entails capital expenditure of $330 million. Part of the funding has been financed through a $235 million seven-year syndicated loan arranged by Citibank, which was also credit enhanced by the export credit agencies. The remainder will come from internally generated cash and possibly an equity offering.

What kind of equity offering?

Well it depends on the state of the markets and the pricing we can get, but we're considering a number of options. Our alternatives include both a private and/or a public offering of common shares and/or convertible preferred shares. A domestic offering combined with a global offering also remains a possibility depending on market conditions.

How can you consider a convertible when you don’t need to raise much to complete phase 8A?

That amount's just for the mobile network. We have other projects we need to fund as well. Total capex comes to $750 million this year and we're also making preparations for funding requirements next year.

Why are you considering a convertible? If you go ahead with one, it seems likely you'll be the only international issuer from the Philippines this year.

That's one of the main reasons for including this structure as an option. It's difficult to raise international equity from the Philippines at the moment and investors like convertibles because they get downside protection; it's a defensive instrument. From our point of view, however, it's not entirely optimal. There's always a danger the issue won't be converted and we might end up having to redeem it. 

How strong are your debt ratios at the moment?

Under the terms of our existing covenants, we have to keep debt to equity below two times, and debt-to-EBITDA under five times. However, we always set ourselves internal targets below this level. We also think that debt levels will peak this year. We're now looking at equity to provide the capital we need.

So you won't be considering a second high yield bond? How is the outstanding deal trading?

It’s actually trading at a premium to issue price – 108/109. This is always pleasing. I believe it’s also tightened to less than 100bp over the sovereign level, whereas when we issued the bond in August 1999, there was a gap of well over 300bp. Because of the kind of growth we’re undergoing, it’s possible that we might tap this market again.

Do you make much use of the domestic market?

Generally speaking, there's a very limited source of long-term funding within the Philippines, so nearly all of our funding comes from offshore. In the domestic bond market, we’ve only been able to raise $24 million so far this year and in total we'll probably raise no more than $40 million.

How exposed are you to foreign exchange risk?

We're able to swap about 25% of our loans into pesos, but the domestic swap market is as shallow as the domestic bond market. To some extent, we're lucky that when we bill long-distance telephone calls, the amount is in pesos, but based on the prevailing exchange rate. I'd say about 22% of our overall revenues are dollar-linked.

What percentage of your funding is in dollars?

About 90%.

What other advantages do the international markets offer?

Principally, that we've been able to make sure that the average maturity of our debt is quite long. The Citibank syndicated loan, for example, is seven years in tenor and the high yield bond a 10-year bullet payment.

Analysts always underline the fact that you're such a high growth company. Your first quarter earnings were more than half total profit for 2000. I believe you reported net profit of Ps1.07 billion ($20.9 million). Will the second quarter be as strong?

We'll report our second quarter figures in early August and they should show that growth has continued unabated. We expect similar growth for the third and fourth quarters as well.

The one negative seems to be that in the past, you've always been the leading digital provider in the Philippines. But, over the first quarter, PLDT's Smart and Piltel added almost twice as many subscribers as you did. What are you doing to combat this competition?

I think I should point out that we are not in a race for subscribers, but a race for profits. At the end of the first quarter, for example, we had 45% of the digital subscriber base, but 53% of its revenue.

Why's this? 

The company's focus has always very much targeted towards the business community. I think we currently have 90% of post-paid subscribers in the business sector. Although tariffs are the same, this sector generates much higher traffic.

What is the general direction for tariffs?

They're in decline and we're proud to say that we've led the market in driving down rates. In addition, handset prices have also been going down. It's now possible to get a pretty good Nokia phone for about Ps3,000, or about $60.

You're principally regarded as a cellular operator. How important to you is fixed line and data?

Wireline data services are very important and this sector currently contributes 4% of our revenues. Fixed line has not been that much of a focus and generally throughout the world, the sector is on the decline. The Philippines achieved equal usage of cellular and fixed line in June last year and by the end of the first quarter of this year, cellular was up to two times fixed.

And what of 3G?

We’ve only just launched GPRS and at the moment we feel the applicability of 3G to the Philippines is fairly limited. Obviously, we're monitoring the global situation carefully, but the government has put any discussion about future licenses on indefinite hold. 

What’s your strategy for Islacom now that the acquisition is complete? Analysts say that they have been particularly impressed by the financial turnaround from a net loss of Ps1.67 billion in 1Q 2000 to a net profit of Ps34 million 1Q2001.

Our main thrust has been to bring costs down to the bare minimum and increase revenue per line. We'll continue to run Islacom as a separate company but from a management perspective, there’ll be one strategic vision across the whole group. Very soon, we intend to re-launch a new Islacom brand. The existing brand has a very small following, so we hope a new one can complement Globe's brand and bring additional subscribers.

What other benefits does the company bring?

Having Islacom gives us access to a total of 25 MHz, 17.5 MHz in the 900 band and 7.5 MHz in the 1800 band. Islacom brings10 Mhz of very valuable spectrum as it’s the last available in the 900 band.

Finally, the Philippines has become well known for its text messaging frenzy. You were the first to introduce this service. Why has it been so popular? 

Mainly because it’s so affordable. Beyond a bucket of free messages, the charge is only about 50 centavos to Ps1 depending on which plan a subscriber is on. The other main reason is probably cultural. The Filipinos are not a people who like to impose themselves. They would much prefer to send a simple text message rather than risk ringing someone when they are in the middle of something important.

How has its popularity boosted your revenues?

We process an average of about 45 million outbound text messages a day and it contributes about 18% of our overall revenue. Between SMS and normal telephone usage, the ratio of messages per subscriber per day is 12 to 1 in favour of SMS. Between June and November 2000, it got up to a high of 15 to 1. I don't think any mobile operator globally can beat these figures. In fact, we saw a recent report showing a 3 to 1 ratio in Europe. Average revenue generated by SMS is also much lower elsewhere in the world, more like 6%. It's been very good for us.