Japanese trading conglomerate Marubeni is nearing a deal to buy a 20% stake in Philippines-based water utility Maynilad Water Services. BMI believes this proposed acquisition highlights the growth potential of the Philippines' water utilities sector.
Marubeni is currently holding negotiations about the stake sale with DMCI Holdings and Metro Pacific Investments Corporation, the majority shareholders of Maynilad. The deal is expected to cost Marubeni around US$400mn and reach financial closing by September. If completed, DMCI's stake in Maynilad is expected to fall to 25%, while Metro Pacific will keep majority control of Maynilad with a 52.8% stake. Maynilad provides water for the western metropolitan region of Manila, with Manila Water supplying the eastern region.
|Japan Makes A Presence|
|Maynilad Water Services - Ownership Structure Before (LHS) And After (RHS) Stake Sale, %|
We believe the proposed acquisition is a positive move by Marubeni as there is significant potential for growth in the Philippines' water utilities sector, particularly in Metro Manila. It is estimated that Metro Manila is currently suffering from a water deficit of around 400,000 cubic metres per day. This deficit could worsen as the demand for water within Metro Manila, the country's most populous and economically important region, is set to increase exponentially. Some studies have predicted that the demand for potable water in Metro Manila could reach 5.1mn cubic metres per day - a plausible scenario given our growth projections for the Philippine economy and population. BMI is forecasting real growth for the Philippine economy to average 4.2% per annum between 2012 and 2021, while the country's total population is expected to increase from 96.5mn in 2012 to 111.4mn in 2021.
|Driving Water Demand|
|Philippines Population (LHS) and Real GDP Growth (RHS)|
This robust potential for growth is also highlighted by Maynilad's expansion plans and its past financial performance. The utility had previously stated (cited by the Philstar) that it would invest about PHP50bn (US$1.2bn) to improve and expand its water services. Maynilad is looking to boost its wastewater coverage from 8% in 2012 to 28% in 2017, and to 100% by the end of its concession period in 2037. The company has also been a positive growth driver for DMCI and Metro Pacific, with both companies achieving double-digit earnings growth from their water businesses, of which Maynilad forms a considerable portion.
|Maynilad A Positive Growth Driver|
|DMCI Holdings And Metro Pacific Investments - Net Income From Water Businesses, PHPmn|
We believe that the proposed stake sale is also beneficial for Maynilad. It would provide the utility access to cheap long-term loans from Japan's official development assistance coordinator Japan International Cooperation Agency (JICA). According to conditions set by the JICA, an enterprise can only have access to these loans if a Japanese company owns 20% of the venture. Marubeni could also provide fresh technology on waste-water management systems to Maynilad. At present, Marubeni operates water treatment businesses in four countries - China, Chile, Peru and Australia.
We also believe the proposed stake sale is an indication that the growth potential in the Philippines' water utilities sector is best undertaken with a local partner. We have previously highlighted the significant reservations towards foreign participation in the Philippine water utilities sector; with the acquisition of the Angat hydropower plant by Korea Water Resources a notable example (See BMI's Project News - K-Water Learns Lesson After Angat Debacle - September 20 2012)