September 14, 2014

SMC sells back PAL stake to Lucio Tan group

In a disclosure to the Exchange, San Miguel Corp (SMC) said that it has signed a joint agreement with the group of Lucio Tan regarding the company’s willingness to sell back its 49% stake in Philippine Airlines (PAL) to Tan’s group subject to certain conditions.

The disclosure did not mention details of the transaction but various newspapers quoted unnamed sources as saying the deal is worth US$1b, half of the amount pertains to the value of the stake while the other half will be used to settle obligations pertaining to the acquisition of new vessels for PAL.

Citing an anonymous source, the Philippine Daily Inquirer reported that the Tan group borrowed US$850m from a syndicate of banks led by Banco De Oro (BDO) and China Banking Corp (CBC) but also included Philippine National Bank (PNB) and Asia United Bank (AUB). Based on the Inquirer report, the loan was backed by shares in several companies of Tan, including PAL.

Our take: If the news reports are accurate, we believe that the deal will be more beneficial to SMC as the cash proceeds can further strengthen its balance sheet. The sale is not necessarily negative for SMC’s oil refinery arm Petron Corp (PCOR) even if PAL is a key client of PCOR. Even before the entry of SMC, PCOR has been a consistent winner of contracts through competitive bidding to supply PAL’s jet fuel oil needs.

The deal should also be positive for BDO and CHIB. The two banks would end up booking a collateralized big-ticket loan in order to provide bridge financing for the buyback transaction. This should be advantageous for both BDO and CHIB, as most local banks have now parked substantial portions of their assets in low-yielding liquid assets because of the liquidity boost that was seen in the past quarters.

Though the loan is not intended for long-term financing, it will provide BDO and CHIB with an outlet to deploy excess liquidity in their balance sheets and an opportunity to earn better asset yields. – WealthSec