Smart tender offer move
Businessman Lucio Tan’s latest action in the country’s flag carrier, Philippine Airlines (PAL), once more proved his business acumen.
Two years ago, when PAL was beset by labor problems and in financial straits, he was able to convince San Miguel Corp. (SMC) to invest in the airline as a major partner and to manage its operations. With SMC’s chief executive officer Ramon Ang at the helm, PAL made peace with its employees and slowly turned the corner.
It was also during Ang’s watch that the United States Federal Aviation Administration lifted its ban on additional flights to the US from the Philippines, PAL’s most profitable international route.
For sentimental reasons or, if the scuttlebutt is to be believed, due to bruised family pride, Tan bought back SMC’s 49-percent stockholdings for $1 billion and reassumed control of the airline.
Citing the competition posed by budget airlines, fuel price fluctuations and tight travel market, some business analysts said the move was ill-timed and would put a heavy strain on the financials of Tan’s companies that funded the deal or borrowed heavily for it.
Not content with regaining control of PAL and, in what may be considered an in-your-face response to his critics, Tan offered last week to buy back the shares of the minority stockholders of PAL and PAL Holdings Inc., PAL’s parent company.
Interests
PAL Holdings is a listed company. Its stocks are traded in the stock market together with two other Tan-controlled corporations, Philippine National Bank and LT Group, Inc.
Under ordinary circumstances, the acquisition of a substantial number of stocks of a listed or public company would trigger the application of the mandatory tender offer rule.
The rule states, among others, that if a party acquires at least 35 percent of the stocks of such company in one transaction or over a 12-month period, the buyer is obliged to offer to buy the shares of the other stockholders under the same terms as the earlier acquisition.
The offer is aimed at giving other stockholders who may be uncomfortable with or averse to the entry of a new majority or substantial stockholder the opportunity to unload their stocks at the best possible terms.
That rule, however, does not apply to Tan’s repurchase of SMC’s shares because he already had majority [in fact, supermajority] control of PAL Holdings even before SMC’s entry. The buyback simply restored his prior existing control over the company.
Thus, insofar as the minority stockholders are concerned, there was no change in their status before and after SMC came into PAL Holdings that would justify the application of the mandatory tender offer rule.
Campaign
According to reports, the terms of the voluntary tender offer for PAL and PAL Holdings stocks are the same as those forged by Tan with SMC. With the similar treatment, the minority stockholders cannot complain that they are being discriminated against by Tan in his bid to further consolidate his control over the two companies.
In case the buyout results in less than 10 percent of PAL Holdings’ stocks being owned by stockholders other than Tan, the directors or officers, or corporations he owns or controls, PAL Holdings would have to be delisted from the stock exchange.
The 10-percent minimum public ownership requirement, or “public float,” is aimed at compelling listed companies to exert the proper efforts to attract public investment in their stocks and not use the stock exchange to “deodorize” their image or take advantage of tax breaks given to exchange trading.
Although PAL’s general manager said that PAL Holdings intends to remain a listed company, the advertisements and press releases in the broadsheets to promote the tender offer are indicative of Tan’s strong desire to buy out the minority stockholders of PAL and PAL Holdings.
The campaign just falls short of being included in the eye-catching “Home in the sky” TV advertisements that feature beautiful flight attendants.
Advantages
Tan cannot be faulted if, at the back of his mind, he wants PAL Holdings delisted, whether voluntarily or involuntarily, and restored to the status of a privately held company. By terminating its listing, PAL Holdings would be spared the exchange’s hefty listing fees and other charges and, more importantly, rid itself of its bureaucratic reporting requirements.
The sheer volume of the reports, notices or disclosures that listed companies are obliged to submit periodically (sometimes, daily if their stock prices fluctuate) often requires maintaining a staff dedicated only to performing that task.
If raising additional capital is PAL Holdings’ reason for being in the exchange, it is in the wrong venue. It is not exactly the darling of the stock market that draws high-end equity or hedge funds to its stocks. The airline business is capital intensive and it is wishful thinking to expect the billions of pesos needed to give PAL Holdings the financial muscle to effectively compete in the international travel market are available locally or can be raised through the stock market.
It has been reported that a Middle East-based airline company with very deep pockets is interested in becoming a strategic partner of PAL. If the deal is successful, PAL Holdings would have no further need for its stock exchange listing.
As a privately held corporation, PAL Holdings would have all the elbow room it needs in dealing with foreign investors without being hamstrung by the regulatory constraints that listed companies have to contend with.
Indeed, El Kapitan (as Tan is fondly called by his peers), reputedly the second richest man in the country, still has a lot of aces up his sleeve.
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