San Miguel buys into PAL, Air Philippines

INQUIRER FILE PHOTO

MANILA, Philippines—San Miguel Corp. has signed a $500-million deal to acquire a significant stake in flag carrier Philippine Airlines and affiliate budget carrier Air Philippines Corp., thus teaming up with the Lucio Tan group for the modernization and re-fleeting of these carriers.

In a statement jointly issued by the Lucio Tan group and SMC, the two groups said this new partnership would “allow the two airlines to strengthen operations and stay competitive with the implementation of PAL and AirPhil’s fleet modernization program.”

SMC president Ramon S. Ang confirmed that under the deal, SMC will buy into PAL and AirPhil through several layers of holding companies. This will lead to SMC’s acquisition of 49 percent of PAL’s publicly listed parent firm PAL Holdings, which in turn will give it effective control of at least 40 percent of PAL.

He added that as part of the package, SMC would get 49 percent of AirPhil.

The SMC operating chief confirmed that SMC would pay $500 million for these indirect stakes in PAL and AirPhil. The conglomerate is also expected to exercise management control over these airlines.

Asked when SMC would take over, Ang said it would be “after the holidays.”

Ang, who had been in talks with Tan for this partnership for many years, said SMC welcomed “the opportunity to participate in the re-fleeting and modernization plans of the two airlines.”

“For Philippine Airlines, the entry of SMC may enhance its re-fleeting strategy given the cash-rich balance sheet of the acquiring conglomerate. The airline may also explore potential strategies with other key assets of SMC such as airport infrastructure and jet fuel access and pricing through Petron Corp.,” said Jose Mari Lacson, head of research at local stock brokerage Campos Lanuza & Co.

San Miguel is involved in the modernization of the Godofredo P. Ramos airport in Caticlan, the main gateway to the famous Boracay Island.  This is the first privatized airport terminal operations in the Philippines. SMC has also expressed interest to participate in the public bidding for the public-private partnership contracts for other airports.

In making this investment, SMC is betting on a heavy influx of tourists in the coming years which will be beneficial to the tourism industry.

“For SMC, the purchase completes the air transportation investment strategy of the company. The conglomerate is developing airports, toll roads leading to airports, and with PAL, an airline that already enjoys a significant market share. The purchase also establishes a business relationship with Mr. Tan, which may lead to joint ventures in alcoholic and non-alcoholic beverages and packaging,” Lacson said.

Lacson said that for Tan, this deal may also open up opportunities to acquire a stake in San Miguel Brewery.  Tan owns Asia Brewery which offers some competition to SMB, which is the undisputed leader in the local beer market, he pointed out.

For veteran stock broker Ismael Cruz, president of IGC Securities, the most significant impact of this deal is that the national flag carrier would remain in Filipino hands.

“SMC has said it will not break up the company. PAL being the first airline in Asia that means being Filipino, we will keep it as one airline company that will remain in Filipino hands,” Cruz said.

Manuel V. Pangilinan and tycoon John Gokongwei, whose family controls budget carrier Cebu Air, had likewise expressed interest in buying into PAL.

In a disclosure to the Philippine Stock Exchange on Wednesday, PAL’s parent company, PAL Holdings, said that its majority shareholder, Trustmark Holdings Corp., had entered into investment agreements with a unit of SMC resulting in the issuance of shares to the San Miguel group, under which the latter will take a minority stake in PAL Holdings.

This investment will comprise 49 percent of PAL Holdings, Ang said.

“The investment through Trustmark will be flowed down to Philippine Airlines which is expected to strengthen and enhance the operations of the airline,” the PAL Holdings disclosure said.

The investment will be made by SMC through a wholly owned unit, San Miguel Equity Investments Inc. (SMEII). Under the agreement, Trustmark and Zuma Holdings and Management Corp. (Zuma)—the holding companies of PAL and AirPhil – will issue new shares to SMEII.

PAL earlier got an imprimatur from Malacañang to spin off its catering, ground handling and call-center reservations units, making it easier for the airline to attract an investor. The spin-off plan was a measure intended to stabilize PAL’s finances due to the lingering effects of the global recession.