PAGCOR: How Much Is It Worth?

SMC has suggested PAGCOR may be worth around P450 billion. How does this figure stack up?

In 2008, the latest year where official numbers are available, PAGCOR had gross income of P30 billion and net income after the 5% Franchise Tax and Government’s Income Share; of P14.1 billion.

Assuming that post privatization Government will continue to take a 52.5% share of PAGCOR’s gross income; and using its 2008 numbers, I have attempted a rough valuation of the company .

The metrics for valuing casinos are price to earnings and Enterprise value (EV) to EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) ratios, with the latter the more popular. EBITDA is the unlevered and pretax cash flow of a company.

I have looked at listed casino companies in the US (MGM Mirage, Las Vegas Sands, Wynn), Malaysia (Genting, Magnum) and Macau (Galaxy Entertainment, Sands China, Wynn Macau). PAGCOR has different franchise restrictions, remaining life (23 years) and tax regime; so its operations are not exactly comparable to others. Nonetheless, the Asian casinos would probably be a closer match to PAGCOR than would the US casinos.

The Malaysian casinos trade at mid-teen price to earnings ratios.

The Macau casinos on average trade at 12.1 times EV to 2010 EBITDA.

Assuming PAGCOR’s  “profit “of P14.1 billion is a proxy for either earnings or EBITDA, then on the Macau valuation PAGCOR is worth P204 billion, on the Malaysian valuation P255 billion. These are very raw estimates.

SMC’s higher valuation of P450 billion is due to the following:

1) SMC believes it can substantially improve the productivity and earnings potential of PAGCOR;
2) Unlike the US, Macau and Malaysian operations, PAGCOR is a monopoly which ups its value;
3) SMC would gain control of the company;
4) PAGCOR has a number of joint ventures in the pipeline which is not reflected in the numbers;
5) SMC wanted to tickle the Government into a privatization. P450 billion is by no means the figure it will necessarily offer.

The true value of PAGCOR can only be established under live market conditions.

Public companies are privatized either through an initial public offering (IPO) or a private sale to a consortium of strategic and/or financial investors.  A private sale through an auction would probably command a higher price than an IPO in the short run. An IPO does not maximize the immediate value of a company since something is generally left on the table for investors.

An IPO also does not cede control to any one party which a private sale does. There is a huge premium for control.

In privatizing PAGCOR, the Government should adhere to the following principles:

1.Maximize the worth of the company OVER TIME, not necessarily in the short term.
2. Promote transparency in the process. This is best served in an IPO where the price is market driven. A private sale is open to accusations of favoritism.
3. Benefit the public. PAGCOR’s privatization should allow the common man to participate in the company’s  future.
4. PAGCOR should conform to certain principles of governance that would be prevalent in a public company, not necessarily in a privately held one.

Here is a suggestion for meeting the objectives of long-term value, transparency and good governance:

Improve the product- PAGCOR should first be brought to international standards before any privatization. Management should be professionalized The Government should appoint upstanding and knowledgeable directors to the Board, not political appointees as currently the practice.

While not essential, a strategic partner might be considered for a minority stake (less than 10%) to assure best practice. Such a partner would provide marketing, technical, and management knowhow; give confidence to future investors and provide an initial valuation.

IPO- Having brought PAGCOR to its full potential, the Government should IPO between 20-35% of the company to establish a market benchmark. A 32% offering would keep Government ownership within the critical 67% that assures it effective control.

Auction- After a few years of trading as a public company and seeing its valuation mature in the market, the Government can consider a private sale of another 20-30% of the company in an auction. One idea is to lower its ownership to 34% where it would retain a veto on major corporate actions.

Further divestment- Government may want to keep a permanent stake of 10-25%. Anything above that could be sold in the marketplace over time.

To recap, the how of a privatization is critical to maximize the long-term value of PAGCOR, promote transparency and good governance. The strategy above is one way to do that.

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About Leo Alejandrino

The blog is principally a commentary on Philippine politics and economics.
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