Lucio Tan group buys back PAL

The group of tycoon Lucio Tan on Monday signed a $1-billion deal to buy back the 49-percent stake in Philippine Airlines (PAL) from conglomerate San Miguel Corp., ending a two-year-old alliance and regaining management control of the now-profitable flag carrier.

SMC president Ramon S. Ang and Tan were seen Monday at the head office of Banco de Oro Unibank, which banking sources said was among those that agreed to provide financial muscle to the Tan group’s PAL buyback initiative. Ang later confirmed in a text message that he had indeed signed the deal with Tan and that payment would be made “within one week.”

The $1-billion estimated amount of the deal covers not only the payment for SMC’s 49-percent stake but the cash advances made by the conglomerate for the flag carrier’s refleeting program.

Inquirer sources said that to fund this buyback, the Tan group borrowed $850 million from a syndicate of banks, including the SM group’s BDO and China Banking Corp. as well as Philippine National Bank and Asia United Bank. The rest will be covered by the tycoon’s existing cash flow.

A banker involved in the transaction said the syndicate involved a number of banks but the bulk would be covered by two banks. Funding from the SM group’s banks was seen a key part of the transaction.

The financing deal obtained by the Tan group was only a bridge financing backed by shares in several Tan-owned companies, including PAL itself, as collateral. Over the long-term, the sources said the Tan group was expecting to repay the loan with the entry of another strategic investor and the cash flow of PAL.

It was earlier reported that Tan had changed his mind about ceding control of PAL for various reasons. For instance, Tan was not too keen on the generous early retirement option recently offered by the Ang-led management to PAL employees, which the tycoon felt would not only front-load expenses but also weed out long-time lieutenants in PAL. There were likewise issues raised on the aviation supply arrangement with SMC-controlled Petron Corp. and the leasing of a big number of aircraft. Another involved certain Tan family privileges that were allegedly lost since the SMC management took over.

SMC, which came in as a strategic partner in 2012, was able to bring PAL back to profitability starting in the second quarter of this year.

There have been volatile buyout discussions between the LT Group and SMC since last year. At first, the Tan group signified its interest to sell its 51 percent to SMC in August last year and the discussion reached the drafting of the share purchase agreement, which was sent to the Tan group on Sept. 30, 2013. By October last year, however, the LT group had sent a letter authorizing an external counsel with full authority to discuss the transaction and the group submitted a written offer to buy the 49-percent stake held by the SMC instead. The offer was accepted by Ang on Nov. 26, 2013, on condition that the LT Group would pay SMC all the advances made for the refleeting.

In April this year, the source said the LT Group offered to sell its 51 percent to RSA through investment bank UBS and a full agreement on the term sheet was made with the final draft submitted to the LT Group only last July 4, with the deal-signing being planned in the following week. Instead of receiving a signing date, however, the source said RSA was advised again by the LT Group that it would prefer to buy out SMC and requested for the details of the advances made by the conglomerate for the refleeting. This came immediately after the announcement of PAL’s cooperation agreement with Middle Eastern carrier Etihad.