The telecoms market in the Philippines was liberalized in 1994.
At one stage the incumbent, the Philippine Long Distance
Telephone Company (PLDT), faced nine competitors. However, only
a minority of the competitors managed to comply with government
demands for the installation of at least 300,000 exchange lines
within three years of entry.
Smart Communications, owned by Indonesia's First Pacific, was
one of the most successful new entrants, becoming the largest
cellular provider in the Philippines. In November 1998 First
Pacific, which already had direct and indirect stakes in PLDT,
acquired a further 17.2% share of the operator for $750
million. This increased First Pacific's holding to 27.4% and
gave the company a controlling interest.
First Pacific subsequently announced plans to fold Smart into
PLDT. It is likely that this will involve a share swap. Piltel,
another cellular operator, which has under-performed and
recorded significant debts, will also be merged with PLDT
through a debt restructuring plan, involving the purchase of
Piltel shares. PLDT will also buy back $268 million in
First Pacific has also revamped the management team at PLDT.
The managing director of First Pacific, Manuel Pangilinan, was
appointed president. Pangilinan is highly respected in the
Philippines as Raymond Ricafort, a telecoms analyst at Merrill
Lynch, explains: "Manuel Pangilinan has two reputations in the
Philippines. First as a big wheeler dealer and a person who has
done well in leveraging small firms that he has turned around
and sold at a higher price. His second reputation comes with
purely his achievements with Smart and with his other
Ricafort believes that the operator is now in a much better
position: "Now, even before the new management, which we
perceive as a much better management, took over the company, we
already liked PLDT owing to their very strong position in the
industry, its profitability and high margins. Now as new
management is already improving these attractive numbers and
margins, we are becoming slightly more bullish on PLDT. The
more we see the company writing off, the more we can see them
improving operations going forward."
In addition, Ricafort believes that PLDT will benefit from
Pangilinan's ability to maximize assets: "I think that his
second reputation of running companies tightly and bringing out
shareholder value and maximizing assets and being a value
creator will remain. I think that the new management team
running PLDT will be positive for shareholders owing to their
ability to run a company tightly and their ability to be open
to new ideas and global changes. They have one of the few
management teams in the Philippines that really look at the
global situation and consider how they will survive in that
kind of environment, rather than look to survive on
protectionist policies or government favours which could lead
PLDT has also appointed ABN AMRO as an advisor, as it looks
for a strategic partner. In an exclusive interview with Global
Telecoms Business, PLDT's president and CEO Manuel Pangilinan
talks about the merger of PLDT, Piltel and Smart into one
group, the search for a strategic partner and PLDT's ambitions
You were appointed President and CEO of PLDT in
November 1998. What are the major challenges you face as the
CEO of the largest telco in the Philippines?
Pangilinan: I would guess that my greatest challenge
is to establish a new direction for the company in light of the
more competitive environment here in the Philippines and of
course changes in consumer demand, technology and the
I also think that change needs to be carried out in a 70-year
old company in a way that maintains the values of PLDT, while
at the same time introducing new methods and perspectives to
Could you tell us about the ownership structure of
PLDT? What synergies do you gain from bringing Smart
Communications and Piltel under the same umbrella? How will
this help you put together integrated packages for
Pangilinan: Well, in terms of our voting ownership of
PLDT, we have approximately 27%-28% of the company. The social
security system has approximately a 10% stake. Consequently 62%
of the ordinary shares of the company are owned by the public.
So there is a really significant public vote in PLDT.
In terms of synergies, quite a number can be derived by
combining Smart, Piltel and PLDT. PLDT's core competence is in
fixed. The combination between three companies means that we
can operate the fixed wire business of Piltel and Smart and
integrate that into the fixed line network of PLDT. In this way
we can save on operating and capital expenditures moving
forward, as Smart and Piltel have built switches and landlines
in certain parts of the country, which we don't have to
duplicate. So I would like to think that we will achieve
economies of capital and operating expenditure, as we move
In wireless we will obtain synergies from putting together the
wireless operations of Smart and Piltel in terms of the
bundling of services, common billing platforms and marketing
approaches and the like. We should see the companies as part
and parcel of the same telecoms group.
How important is it for PLDT to find an international
strategic partner? What kind of relationship are you looking to
form? Does the search for an international partner indicate a
need to improve in areas such as marketing and value-added
Pangilinan: I think that an international partner
could bring a great deal of value to the table. It is most
likely that this will be a major international telco who can
therefore bring new technologies that are available offshore
and their own experience in their respective markets,
especially in markets that have been deregulated. We could
learn from that.
Of course we would also gain access to capital, which could
enhance PLDT's credit standing. So I believe that many good
things could be derived from a strategic partner.
In terms of the actual relationship, an investor in PLDT would
be entitled to participate at board level. I guess that we
would like to enter into discussions with them over their role
Why did you decide to appoint ABN AMRO to help you
find a strategic partner? When do you expect to reach a
decision about a foreign partner?
Pangilinan: We recommended to the board of PLDT an
advisor to the company in that search and selection process,
and the board approved our recommendation.
There should be some objective criteria that will drive the
determination of the strategic partner that could benefit PLDT
in both the short and long term.
In terms of timing, I would like to think that something
should be done within the year, as we plan to go to our
shareholders in late June to ask for an increase in our
authorized capital that will facilitate the entrance of such a
Do you plan to raise capital in 1999? Will you issue
new shares? Or will you issue high-yield bonds? Which banks
would you use to carry out such offerings? Or would this
involve the sale of a strategic stake to a foreign partner? How
would these measures dilute earnings?
Pangilinan: We said that we do intend to raise
capital in 1999 by about $500 million. That will be
accomplished by issuing new ordinary shares to prospective
investors, both existing and perhaps new ones. We have no
intention of increasing debts through bond issues.
Apart from the financial advice that we are receiving from
ABN-AMRO, no bank has been appointed so far to carry out such
an equity offering. The sale to a strategic partner is part and
parcel of the fund raising. We would hope that these measures
do not dilute earnings. Our aim is to issue these shares,
particularly to a strategic partner, at a price that would not
dilute earnings, but would in fact enhance earnings.
In terms of cellular, how important is it for PLDT to
acquire Smart? What opportunities are there in cellular for
Pangilinan: Smart is the largest cellular operator in
the country. It is profitable and generates significant free
cash flow from its operations. I would like to think that PLDT
should seriously consider acquiring Smart.
In terms of opportunities, we do have the ability to bundle
services in a market segment that is growing rapidly: cellular
growth will certainly exceed fixed growth. There are
opportunities to make money from cellular, as is evidenced from
the experience of telcos in other countries.
How many subscribers do you currently have? How do you
view the competing technologies, GSM and CDMA?
Pangilinan: In fixed PLDT has a little over 1.6
million subscribers now. Smart has 820,000 cellular
subscribers. We run both GSM and CDMA systems. Smart has just
launched a GSM system and Piltel has a CDMA system. The
emphasis will be on GSM rather than CDMA.
Are we likely to see a PLDT-Smart share swap in 1999?
If so, how will this dilute earnings for PLDT
Pangilinan: We would hope to complete the acquisition
of Smart in 1999. Yes, you are right: the acquisition would
probably be carried out through the issue of new shares to
In terms of 1999 earnings, I expect that this deal will be
completed towards the latter part of the year. So the impact on
PLDT's earnings will probably be minimal. I would like to think
that the impact on earnings/share will also be very minimal in
1999. The terms of the acquisition should be arranged to
enhance PLDT's earnings and consequently EPS. So we will
endeavour to structure the acquisition under those terms.
Will you integrate Piltel and Smart into one
operation? How long will this process take? Which suppliers do
you work with in cellular?
Pangilinan: We will integrate the cellular operations
of Piltel and Smart. The process should start as soon as we are
able to complete the acquisition of Smart. I think that it will
take one-two years before the cellular operations are fully
integrated into one unit. On the Smart side, we are working
with Ericsson and Nokia. On the Piltel side, we are working
with Motorola and Lucent.
In your opinion how difficult will it be to merge
PLDT, Smart and Piltel? How much do you expect to save on
Pangilinan: I think that the merger process will not
be easy. But I would like to think that the merger process will
be facilitated by a lot of goodwill internally among the
management, employees and staff of all the companies to make
this thing work. I am very optimistic that the merger of the
three companies will in due course be successful. There is no
resistance. There is no game playing.
There is a great deal of desire to form an integrated and very
efficient telecoms group. I think that it is too early to
quantify savings on capital expenditure, as we move forward,
because they are quite separate companies at this point in
time. The legal aspect should be completed this year. We aim to
start the merger process by the end of the year. I think that
it will take two-three years before we finally bed down the
merger participants if you may.
In 1998, PLDT's net income totalled Ps1.107 billion
($25.9 million). In 1997, net income totalled Ps7.649 billion.
What led to this dramatic decline?
Pangilinan: In 1998 we placed significant provisions
against revenues and receivables and also provided for
operating expenses that should in our opinion be booked for
The combination of those three items severely impacted on the
profit and loss position of PLDT. Now most of these are
one-off, non-recurring mandatory items. On a recurring basis,
we witnessed actual growth of about 3% in PLDT's profit
Piltel posted a loss of Ps4,121 billion in 1998. In an
industry which is witnessing high levels of growth, why has
Piltel posted such dramatic losses? How are you going to
rectify this situation?
Pangilinan: Again the losses of Piltel are
attributable mainly to one of the provisions against
receivables and over-coercive revenues, certain income that we
reversed owing to the property gains in 1997 that we did not
push through and complete in 1998. So we reversed that income.
A significant proportion of this loss is attributable to this
reversal and said provisions in the books.
On an operating basis, Piltel recorded a loss principally
owing to its high debt position. I believe that it was positive
on an EBIT basis, but was negative, after you report interest
You asked me how we can turn things round. On the financial
side we have reached agreement with the banks on debt
restructuring, so that Piltel can eventually become cash flow
positive and income positive over the next few years. Why has
it recorded such losses? The losses are on the whole
attributable to its high levels of debt and capital
expenditure, because it has built a CDMA system alongside its
existing analogue system. Therefore its depreciation levels are
quite high. The growth in the subscriber base has not risen to
a point where it has compensated for the increased expenses,
both operating and interest charges.
How do you view the prospects for pre-paid in the
Philippines? Surely such a service should enable you to reduce
losses at Piltel?
Pangilinan: I think that the prospects for pre-paid,
especially in a tight economy, and a slow economy such as the
Philippines, are bright. Piltel is the largest pre-paid card
provider here in the Philippines. Increases in subscriber
numbers should help to reduce the losses of Piltel.
How are you restructuring Piltel's debt? Have the
discussions with Marubeni reached a conclusion? If we can talk
about bad debts, what steps are you taking to reduce bad debts
Pangilinan: The talks with Marubeni have not reached
a conclusion. We are engaged in very active discussions with
all the creditors at this point in time. I am quite optimistic
that management will be able to come to terms with them. We are
taking very active steps to reduce bad debts. We have a new
management team at Piltel that is looking at all the accounts
one by one. There is active solicitation in terms of
How do you view the regulatory environment in the
Philippines? Do you think that the levels of inter-connection
will be fair to new entrants and established players
Pangilinan: Well the regulatory environment here has
been quite encouraging to various operators. So we think that
they have been quite responsive to industry needs and the
requirements of different players here in this country. I think
that the regulator and industry players are continuously
debating the issue of inter-connect.
Our view is that we should finalize a government policy for
providing inter-connect facilities to the various carriers
using our system, subject of course to a satisfactory
conclusion of the terms under which those bilateral
inter-connect agreements could be reached.
What are the levels of Internet penetration in the
Philippines? How are you trying to tap into the data market?
Which packages are you offering customers?
Pangilinan: The Internet market here is still taking
off. So I think that the penetration rate - if you quantify it
on the basis of the number of users as a percentage of the
population - amounts to probably less than 1% at this point in
We will enter the data market. This is something that we are
considering very seriously. In fact PLDT is one of the largest
ISPs in the country. It is only logical for the company to
become involved in data transmission services as well. We have
a broad range of Internet service packages.
We hope to expand the content through partnerships here in the
Philippines and obtain more content from abroad. We should be
able to complete the installation of the international Internet
gateway by the middle of the year and thereby open the portal
if you may for domestic Internet users into the international
Does data account for a significant percentage of
revenues? Which value-added services do you intend to offer the
business sector? How is PLDT trying to participate in the
Pangilinan: Data revenues currently account for less
than 10% of revenues. In terms of corporate accounts, we have a
VSAT satellite infrastructure and digital fibre-optics to cater
for business data transmission requirements anywhere in the
world and in the Philippines So we carry a broad range of data
At the moment our role is to provide a highway for
broadcasting. As I mentioned, we have the satellite up there.
We also have the largest and most expensive VSAT infrastructure
in the country and a nation-wide and state-of-the are digital
fibre-optic network. We can only carry broadband services for
various broadcast companies here in the Philippines. This is
due to existing regulations in the Philippines, which do not as
yet allow for any convergence between broadcasting and
How do you intend to improve the company's overall
efficiency? According to analysts, it has some of the lowest
efficiency levels in the region. How are you trying to change
the company culture?
Pangilinan: We have benchmarked PLDT against certain
operating efficiency ratios of the more efficient regional
telcos and also international operators. Our goal is to push
PLDT to meet first of all the standards of regional telcos and
eventually those of international telcos in terms of
lines/employee, capex/employee, operating expenses/employee and
We are even looking at such operating efficiency ratios as
completed calls and similar areas on a domestic and
international basis. Therefore we are considering those ratios
very carefully and seeing how we stand in relation to them. In
many ways though, PLDT is moving in that direction already.
We perceive opportunities to enhance revenues by offering a
broader range of services and products. There are opportunities
to reduce operating costs. This is something that we are doing
right now, in terms of headcount, advertising and other
expenses. We have opportunities to save on capex through this
merger between companies. We can throttle capital expenditures,
because we have some surplus capacity in the system, especially
once we have absorbed Smart and Piltel.
So capital expenditure should be mitigated starting in the
year 2000. We are trying to change the company culture mainly
by example. We don't believe that this should be achieved
through radical surgery, but rather by example. We believe in
explaining to the management and staff here why certain changes
are necessary. We like to build these changes through consensus
and leadership by example.
Will you have to reduce the number of employees
significantly over the next year? Is the company undergoing a
radical restructuring programme?
Pangilinan: The company already has a continuous
voluntary manpower reduction programme. So we will just
continue this programme over the next few years. No radical
restructuring programme as such is being undertaken.
Is PLDT disposing of non-strategic assets such as real
Pangilinan: We are disposing of real estate right
now. We have taken a look at this area and identified the first
batch of real estate that is not required by our operations.
This is a continuous programme that we have launched.
Can you describe your capacity utilization improvement
and network rationalization programmes? How successful have
they been so far? What are the core changes?
Pangilinan: We perform a constant review of capacity
utilization and rationalization, assessing where the lines are
located and where market demand is located. So we try to marry
supply with demand in specific geographic areas, because in
certain instances the demand is there, but there are no working
lines. In other areas we have the working lines, but demand is
already covered. So to some extent we should be able to
rationalize the network in that way.
In terms of the network architecture, we are in discussions
with all our major suppliers, Siemens, Alcatel and NEC and
receive proposals from them over the best way of rationalizing
the network architecture to make it more efficient and reduce
capital expenditure, as we go forward. I think that it is too
early to determine how successful it has been, but I would like
to think that we will be in due time be able to rationalize the
network of PLDT, together with the networks of Smart and
How do you view the convergence of broadcasting and
Pangilinan: I would like to think that PLDT's
participation in the convergence of broadcasting and telecoms
is inevitable. The market and technology imperatives and
consumer demand imperatives will drive convergence eventually.
I believe that legislation will have to be realistic and
recognize this development. All the imperatives will persuade
the legislators to allow such convergence.
In fact I think that our government has a paper that allows
for comments on precisely such convergence in future. We have
no choice. We must participate in the convergence process,
because we are the largest telecoms player. I would like to
think that PLDT will play a significant role in promoting such
convergence. We will be a key driver in that process because
the Internet platform is a viable approach to the convergence
of data, video and voice.
What are your opinions on rate rebalancing? Do you
think that it is a level playing field? Do you think that the
NTC will approve rebalancing for local metered service? How are
you trying to redesign tariff schemes?
Pangilinan: Yes. I think that this is something that
the industry needs for two reasons. Firstly the local metered
scheme is equitable to everyone, because you pay for what you
use. Secondly rate rebalancing is important as international
accounting rates go down, as will international revenues.
Therefore, we should support and subsidize domestic
requirements which are going down. There is a need for
rebalancing. It will have to be a level playing field: whatever
applies to PLDT should apply to other players in the industry.
I think that in due time we can persuade the government to
approve the local metered scheme. We are trying to redesign
tariff schemes in a way that is responsive to consumer needs. I
think that it is still early days to predict how that redesign
What are PLDT's regional ambitions? Do you have any
ambitions to become a regional hub for international traffic?
Do you plan to expand PLDT's reach?
Pangilinan: No. We don't have any regional ambitions
at the moment. We are heavily focused on the Philippines. We
would like to become a regional hub in future. That is one of
the things that we would like to talk about to a strategic
investor in terms of the value that they can bring to the table
in making PLDT a regional hub for their international traffic.
What do you perceive to be the prospects for satellite
communications? How well is Mabuhay Philippines Satellite
performing? How does it fit in with your cellular
Pangilinan: Well I think that in the long term
prospects should be OK. In the short term, there is significant
surplus capacity of transponders in the region. So we have to
be very competitive. Mabuhay is performing reasonably well in
the circumstances. It does fit in with our cellular operation,
as we could use that to transmit signals on a country-wide
What are your hopes and ambitions for the company over
the next few years? What trends do you see emerging in Asian
telecoms over the next five years?
Pangilinan: I would like to see PLDT as the preferred
provider of voice, video and data in the Philippines and be a
quality company that everyone could emulate and admire in terms
of quality management, quality service, price and coverage that
our consumers want.
In terms of trends, basically I see four trends - the
convergence of fixed, wireless, Internet/data transmission and
of course broadcasting. We want to be a quality company that
provides quality service to consumers and also be very
profitable for our shareholders.