THE MERALCO STORY

 

By Juan Ponce Enrile

Manila Electric Rail and Light Company, known to us as MERALCO, is probably the oldest company in the country. It was organized in 1902. The former owner of MERALCO was General Public Utilities (GPU), an American corporation.

 On January 5, 1962, GPU sold its shares in MERALCO to Meralco Securities Corporation (MSC) for a price of US$ 54.4 million. MSC was then a newly formed Philippine corporation. The man behind it was Eugenio Lopez, Sr. 

 When the sale was done, MSC paid 10%, or US$5,400,000,  of the purchase price of US$54.4 million. The  remaining balance ofUS$49,000,000 was paid in 9 equal yearly instalments starting one year after the sale. 

 The remainder of the purchase price earned a 3% interest per annum on the unpaid balance. The payment of the second and subsequent installments, plus interest, was secured by revolving irrevocable letters of credit issued by a syndicate of 16 Philippine banks and confirmed by a syndicate of 10 United States banks. The acquisition of the GPU interest in MERALCO was thought as a self-liquidating investment. 

 MSC was formed in 1961. Its primary purpose was to acquire the GPU shares in MERALCO. From the start of its corporate existence, MSC had a problem with its capital structure. Although MSC had 12,000 stockholders, a small group of 100 owned 66% of the entire capital stock of the corporation. This meant that these 100 stockholders controlled MSC and enjoyed 66% of its income from MERALCO. 

 The capital structure of MSC became more serious a problem when the 1973 Constitution was adopted. The 1973 Constitution decreed in its Article II that "the State shall regulate the acquisition, ownership use, enjoyment, and disposition of private property, and equitably diffuse property ownership and profits."  

 MERALCO was then and now a public utility company owned and controlled by 100 large stockholders and serving more than 600,000  electric consumers in its early years after it was acquired from GPU. 

 MSC's acquisition of the shares of MERALCO was a  big success. From 1962 onwards to 1969, MSC was earning huge income from MERALCO. Its stockholders enjoyed a flow of dividends that ranged from 2% to 3% every quarter of the year plus an extra yearly dividend in December  that ranged from 2% to 7% of their individual investment. 

 However, nothing in this world is permanent. All good things in life has an end. MERALCO was no exception. From 1970 the income flow of MSC from MERALCO  gradually dwindled. The earnings of MERALCO from its operation began to slow down since 1969 onward to 1972. As a result, the financial strength of MSC began to wane. Its owners were no longer getting their rich bonanza. The adverse situation began in the last quarter of 1971. MSC - the fabled gold mine of King Solomon from 1962 to mid-1971 - turned into a gaping  barren pit at the end of 1971. 

 Benpress - the solid and powerful corporation of the  two famous Lopez families -  was the largest stockholder of MSC. Alone, it owned 27.2% of that corporation. This was over and above the personal individual investments of the other members of the Lopez clan. The combined ownership of the members of the Lopez families in MSC - those of  Eugenio Lopez, Sr., and those of his brother, former Vice President Fernando Lopez - was about 33%.

 By 1974, Benpress suffered past due debts - in dollars and in pesos - from foreign and domestic creditors  amounting to P101.1 million. Some of these overdue debts  started to become past due as early as March 1973. 

 Because of the pressure of maturing debts that Benpress could not pay, Eugenio Lopez, Sr. wrote a letter,  dated February 19, 1973, to President Marcos. In that letter Eugenio Lopez, Sr. said: "Nanding and I are also in accord with your concept of democratizing property in the Philippines and believe that ownership of industries vital to the economy should be dispersed as widely as possible. . . .  . for this reason, Nanding and I would like to offer the sale of our holdings to a cooperative composed of Meralco employees, customers and the general public that could be organized with the assistance of the government."  

  Apart from  that letter of February 19, 1973, Eugenio Lopez, Sr. wrote two other letters to President Marcos - one dated March 20, 1973, and another dated September 17, 1973,  indicating the pressure of the debt problem on him and  pleading for the help of the Government to relieve the financial distress of Benpress. So urgent was the situation then that Oscar Lopez himself, the second son of Eugenio Lopez, Sr. and my contemporary in Harvard University, personally delivered his father's letter of March 20, 1973 to President  Marcos.  

 Eugenio Lopez, Sr.'s letter of February 19, 1973 triggered an earnest effort to find a way to address  the financial burden of Benpress. But the offer of Eugenio Lopez, Sr. to sell the Benpress 27.2% holdings in MSC to a cooperative of employees and consumers of MERALCO and the general public was found to be unfeasible. To make it feasible, it would require the sale of all the MSC shares to the contemplated cooperative. 

 Given the urgency of the debt problem of Benpress, the sale of all such MSC shares to a cooperative was difficult to attain within the limited time available to solve the problem of the maturing debts of Benpress. Besides,  such a sale would have greatly depressed the price of MSC shares in the stock market. At that time, the price of MSC shares in the stock market was already far below their book value.  

 Alfredo Montelibano who was Chairman of MSC and trusted friend of Eugenio Lopez, Sr., proposed that  the Government acquire all the MSC shares by paying for them in Land Bank bonds. This proposal was made in a letter dated April 10, 1974 of Alfredo Montelibano to Alejandro Melchor, who was then the Chairman of the Government Power Development Council.  The Montelibano proposal did not fly.

 Then Oscar Lopez proposed a trusteeship plan. Antonio Ozaeta and Antonio Ayala, both executives of MERALCO, and Christian Monsod, an executive of MSC, were supposed to serve as trustees.  The details and terms of that trusteeship plan were outlined in a document on file with the records in my possession. The document proposing that trusteeship plan is too long to be included here. All I can say about that trusteeship plan is that it was never pursued.

 Finally, a novel approach was proposed. It called for the creation of a non-stock Foundation to dismantle the ownership and control of the miniscule number of individuals in MSC. The  Foundation was thought of as a tool to make all electric customers owners of shares in MSC and, indirectly, in MERALCO as well. No person or group of persons was to be allowed to enjoy any private profit or gain from the Foundation. This proposal prompted Eugenio Lopez, Sr. to write his September 17, 1973  letter to President Marcos. In that letter, Eugenio Lopez, Sr. said: "As you know, Benpress is the holder of 27.2 per cent of the outstanding capital stock of Meralco Securities Corporation ("MSC"). I would like to submit for your consideration  a proposal pursuant to which Benpress would sell all its holdings of MSC shares, on the basis of self-liquidating investment, to a Foundation created with your approval."

 The offshoot of that letter of Eugenio Lopez, Sr. was the formation of the Meralco Foundation on November 6, 1973. Its  incorporators were: Senen J. Gabaldon, Mario Camacho, former Central Bank Governor Miguel Cuaderno, Mamerto Nepomuceno, Generoso Tanseco, former Central Bank Governor Andres Castillo, and Delia Tantuico. Its Board of  Trustees included all the incorporators plus the then Ambassador to the Vatican Carlos Valdez. 

  On November 29, 1973 a Stock Purchase Agreement was executed between Benpress and Meralco  Foundation, whereby Benpress would sell to Meralco Foundation its 5,907,732 shares in MSC for a consideration of P133,337, 511.24.

 Then on December 16, 1974, the final Deed of Sale was executed by Benpress in favor of Meralco Foundation to implement the Stock Purchase Agreement of November 29, 1973. Under the terms of the sale, Meralco Foundation assumed Benpress' indebtedness of P101.1 million to its foreign and domestic creditors, and the P9.6 million indebtedness of Benpress on its stock subscription of MSC shares, plus  payment to Benpress of P48.6 million for its equity in MSC.

 After the Benpress-Meralco Foundation transaction was done,  other MSC stockholders sold their shares to Meralco Foundation. In 1976, MSC was renamed First Philippine Holding, and by the end of that year, Meralco foundation owned 45%  of First Philippine Holding and the remaining 55% was owned by the general public. 

 In 1977, Meralco Foundation bought from First Philippine Holding  24,935,839 shares of MERALCO for P872.7 million. A down payment of P204,000,000 was made and for the remaining balance of P668,700,000 of the purchase price, 12-year promissory notes were issued.  

 The down payment of P204,000,000 was a loan from the Development Bank of the Philippines. That loan was secured by a pledge of 11,700,000 MERALCO shares.

 In 1979, Meralco Foundation and First Philippine Holding amended their sales agreement to provide that:       (1) First Philippine Holding could demand the reconveyance of unpaid shares; (2) First Philippine Holding could use unpaid shares as collateral for its own borrowings; and (3) First Holding could demand automatic reversion of title over unpaid shares that had been pledged.

  Meanwhile, First Philippine Holding borrowed US$48,000,000 from Citicorp. This debt was secured by 25,000,000 shares of MERALCO that were still unpaid by Meralco Foundation.

 Shortly thereafter, First Philippine Holding retired the Citicorp loan with a P434,000,000 loan from the Development Bank of the Philippines. This loan was secured by a pledge of 16.2 million MERALCO shares. At that time, 13.9 million of those pledged shares were not yet paid for by Meralco Foundation. 

 In 1984,  MERALCO itself became financially distressed.  It stopped paying dividends to First Philippine Holding. Consequently, Meralco foundation stopped paying First Philippine Holding and DBP. And First Philippine Holding also stopped paying DBP. 

 

 By 1986, Meralco Foundation owed DBP P181,900,000. This was secured by 11.7 million fully paid shares of MERALCO. 

 First Philippine Holding also owed DBP P416,000,000, secured by 16.2 million MERALCO shares.  These 16.2 million MERALCO shares included 13.9 shares that Meralco foundation had not yet paid.

 After the EDSA Revolution, DBP transferred both its unpaid loans, as of June 30, 1986,  to Meralco Foundation in the amount of P181,900,000 and to First Philippine Holding in the amount of P416,000,000 to the Asset Privatization Trust of the Presidential Commission on Good Government for a consideration of P598,200,000. 

 Also, after the EDSA Revolution, First Philippine Holding cancelled the sale of unpaid shares numbering 13.9 million shares of MERALCO to Meralco Foundation. This resulted in Meralco Foundation owning 66% of MERALCO, and First Philippine Holding  owning 32%. The riddle in this sordid corporate actions was: Who got the missing 2% of MERALCO?

 Finally, all the trustees and members of the Meralco Foundation resigned. And all their replacements were appointed by President Corazon C. Aquino.

 

 This, my dear friends, was the suppressed story of MERALCO all these years.