July 30, 2014

SMC, Lucio Tan eyeing control of PAL

Quoting unnamed sources, the Philippine Daily Inquirer today said that both San Miguel Corporation and Mr. Lucio Tan are looking to gain full control of Philippine Airlines (PAL). While Lucio Tan is reportedly raising funds to buy back the 49% stake it earlier sold to SMC, the latter is ready to buy the remaining 51% if Mr. Tan fails to generate the amount.

The news report quoted estimates that Lucio Tan will need to raise about US$1b to pay back the initial SMC investment in the company and the cost of aircraft that the new management has purchased.

Our take: While the new management has gained grounds in improving PAL’s operations, the business has remained challenging amid tight competition and rising costs. PAL has provided some synergy within the SMC group which owns an oil refinery (Petron Corp, PCOR) and food manufacturing units. However, the challenging environment in the airlines industry has continued to weigh on PAL.

If the news report is true and if SMC can recoup its initial investments in PAL, the amount can provide a big boost to SMC’s cash flows that can better be used to strengthen its balance sheet or reinvest in its other businesses. Management should also be able to focus on growing key core business operations.– WealthSec