SMC paying $500M to acquire 49% stake in PAL, AirPhil

Manila Bulletin
April 5, 2012
By James A. Loyola

San Miguel Corporation (SMC) has signed investment agreements with business taipan Lucio Tan for the acquisition of a minority stake in flag carrier Philippine Airline Inc. (PAL) and low-cost partner Air Philippines Corporation ( Air Phil) for $500 million.

  SMC President Ramon S. Ang confirmed in a mobile message that SMC will be acquiring shares equivalent to a 49 percent interest in PAL and AirPhil.

  In a joint statement, SMC and Tan said that the agreements will result in the issuance of new shares to the diversified conglomerate.

  The agreements were signed late Tuesday.

  Under the agreement, Trustmark Holdings Corporation (Zuma), Tan's holding companies of PAL and Air Phil, will issue new shares to San Miguel Equity Investments Inc., a wholly owned subsidiary or SMC.

  Tan and SMC President Ramon S. Ang said the new investment will allow the two airlines to strengthen operations and stay competitive with the implementation of PAL and Air Phil's fleet modernization program.

  Ang said San Miguel welcomes the opportunity to participate in the refleeting and modernization plans of the two airlines.

  SMC chief fiance officer Ferdinand K. Constantino said earlier that this investment is "in preparation for the projected heavy influx of tourists in the coming year which will be beneficial to the tourist industry of the country."

  San Miguel's investment "will help the flag carrier in its refleeting program and make the airline more viable and competitive," Philippine Airline President Jaime Bautista said in an e-mailed statement.

  The deal is milestone in Philippine business since Tan's Asia Brewery and Tanduay Distillers are rival of SMC's traditional beer and liquor businesses, San Miguel Brewery Inc. and Ginebra San Miguel. Tan controls listed PAL Holdings which directly owns 82 percent of Philippine Airlines which has been steadily losing market shares to budget airlines led by Cebu Pacific.

  PAL has recently become more attractive to investors after having successfully resorted to outsourcing key services to leave the company leaner and more cost efficient.

  If PAL holding issues shares for the prospective SMC investment, it may also help the firm comply with the PSE's minimum public float requirement. Tan has assured that they intend to comply with that requirement.

  PAL reported a net loss of $33.5 million in the three months ending December, reserving a profit of $15.1 million the previous year.

  It had said the losses were mainly due to soaring fuel costs and made known it was looking for fresh money to upgrade its fleet, which has lost its status as the nation's most popular carrier to low-cost rival Cebu Pacific.

  PAL was also forced to cut hundreds of flights in September after a day-long wildcat strike by ground crew who were protesting the outsourcing of 2,600 catering, airport services and call center reservation jobs.

  It took the airline more than a month to cut the flight backlog.

  San Miguel, in contrast, is flush with cash and has been aggressively expanding its business portfolio.

  The brewer, which is also Southeast Asia's largest food company, began its successful diversification strategy a decade ago.

  Its acquisition include Petron, the country's largest oil refiner, US giant ExxonMobil's refinery and petrol retail station in Malaysia, and a third of Manila Electric, the Philippines' largest power destributor.

  San Miguel has also embarked on infrastructure projects in the Philippines, including the building of troll highways, rail systems and an airport.

  The purchase eould support Ang's goal of increasing sales to 1 trillion pesos ($23billion) by 2016 through expansion beyond its main food and brewing business into industries such as oil, power and infrastructure. It will help unprofitable Philippine Air raise funds to add planes and routes amid market share losses to budget airline Cebu Air Inc. and increased competition from AirAsia Bhd.

  "It might take time to recover the investment, but given the outlook on tourism and infrastructure, PAL should eventually contribute to San Miguel's bottomline," Jonathan Ravelas, chief market strategies at BDO Unibank Inc. in Manila, said before the announcement. "San Miguel wants to be an integrator by putting up a complete infrastructure offering."

  "San Miguel won't invest unless it knows it would eventually get control," said Jose Vistan, research head at AB Capital Securities Inc. "It's coming in as a minority investor, but will capital raising or some arrangement, San Miguel will likely gain control eventually." (With Bloomberg repot)