San Miguel Buys into PAL

To infuse US $1 Billion for Fleet Expansion 

 January 24, 2012

Food and beverage giant San Miguel Corporation has agreed to buy shares of PAL Holdings and finance the refleeting and modernization program of Philippine Airlines. PAL Holdings directly owns 81.57% of Philippine Airlines.

The deal includes budget carrier Airphil Express, its low cost subsidiary.

San Miguel offered $500 million in cash and another $500 million in equity infusion in exchange for a 49-percent stake in both PAL and Airphil, but secures management control of the two airlines.

A disclosure to the Philippine Stock Exchange said San Miguel Corporation would increase the capitalization of PAL and its low cost subsidiary to buy new aircraft.

PAL Holdings Chief Finance Officer Susan Lee confirmed to the stock exchange investments by San Miguel in PAL Holdings.  

The plan calls for the purchase of 12 medium sized long-ranged planes either from Airbus or Boeing, with Airline engineers taking a closer look and evaluation at the Airbus 350-900 planes which order is scheduled to be announced before the end of the year. First aircraft delivery is scheduled to take place in March 2016.

"Wide-bodied aircraft are needed. You need to pay delivery fees. That’s where the cash is needed,” Airline President Jaime Bautista said.

San Miguel is currently holding due diligence audit with the airline which is expected to be finish next week. Joint announcement is expected on the next General Assembly Meeting in April.

As a result of San Miguel investment, Lucio Tan would remain chairman of PAL with San Miguel President Ramon Ang, as its Chief Executive Officer. PAL president Jaime Bautista will remain Chief Operating Officer.

PAL Holdings operates a fleet of 51 aircraft and 22 on orders as of March 2011.


  1. Nice!! Looking forward to it..

  2. We have the facts straight months ahead before it reached broadsheet.

    SMC acquires 49% of PAL Holdings
    $500-M investment to give it management control
    By: Doris C. Dumlao

    San Miguel Corp. has firmed up a deal to acquire 49 percent of tycoon Lucio Tan’s PAL Holdings Inc. for about $500 million, thereby obtaining a significant foothold in national flag carrier Philippine Airlines.

    Inquirer sources said SMC and the group of Lucio Tan agreed in principle for the former to buy into PAL’s parent company before the SMC’s exclusivity period lapsed in end-March.

    An emergency board meeting was convened by PAL Holdings on Monday [April 2] afternoon to discuss the deal with SMC, which had been in the works for the last three months.

  3. Why PAL deal took so long
    By Boo Chanco

    PART 1

    The deal for San Miguel to help rehabilitate Philippine Airlines should have been wrapped up early this year. A Memo of Understanding had been signed but talks over the final agreement just kept going on and on.

    It was anticlimactic when a disclosure to the stock exchange last Wednesday announced that the “investment agreement” had finally been signed the night before. I texted San Miguel’s Ramon S. Ang for confirmation and he quickly texted back that indeed it is true, “yes, final na.”

    The disclosure says new shares will be issued to San Miguel for a minority stake in flag carrier Philippine Airlines (PAL) and low-cost affiliate Air Philippines Express (AirPhil). San Miguel will have management control.

    I do not understand why San Miguel will part with all that money for a minority stake albeit with management control. Given how unpredictable Lucio Tan and his various families can be, San Miguel shareholders must be told how iron clad that management agreement is.

    I suspect there is also agreement for RSA to eventually get a strategic partner, a regional airline, to help run PAL and together have a majority. I remember him saying that PAL needs to be part of an alliance or consortium of airlines to facilitate marketing and operations, including management of frequent flier freebies.

    For now, the fresh money to be injected by San Miguel, an initial $500 million, will all go towards the refleeting and modernization plans of the two airlines. Both carriers are struggling to remain competitive and need to replace ageing aircrafts that are not as fuel efficient as the new models.

  4. Why PAL deal took so long
    By Boo Chanco

    PART 2

    Insiders in the taipan’s camp say the final agreement took as long as it did because of the taipan’s complicated “multi-family” situation. At least two of the taipan’s multiple families are in active competition with each other for power within the taipan’s conglomerate.

    The loss of control over PAL mostly affects the interests of the taipan’s first family, as they benefit from internal business from PAL generated by Macro Asia and Lufthansa Technik. There is also the question about the children of the taipan working at PAL. Mr Ang had previously commented in one of our conversations that it would be difficult to manage PAL if the taipan’s children retain their management positions. The latest I heard... the three children from the first and second families holding top PAL positions are leaving once Mr Ang assumes control.

    The taipan himself was initially reluctant to let go of the honor of being Chairman of the airline, which explains why RSA structured his offer to allow him to keep the position. The taipan was eventually persuaded to let go because of the large amount of money needed for recapitalization. The taipan is no longer inclined to put in more money in the airline after significant losses again in its last fiscal year, the more than a billion pesos at stake in that Supreme Court battle with the flight attendants and fast rising fuel prices.

    Mr Ang estimates that PAL will need at least a billion dollars to give it a chance to be competitive, with most of that going to the acquisition of new aircraft. Mr Ang observed that with its ageing 747 fleet, the airline is already at a big disadvantage because the jumbo jets are 30 percent less fuel efficient than the new models. With rising fuel costs and the growth of low cost carriers, PAL struggles to survive this disadvantage. The country being in Category 2 also doesn’t help.

    San Miguel was not the only suitor for PAL. Manny Pangilinan also made a proposal to completely buy off the airline from the taipan. But he also confessed that he was making the offer with the support of the Gokongweis of Cebu Pacific, the strongest PAL competitor today. Michael Tan, reputedly the more capable son of the taipan, was said to have confirmed this from his friend Lance Gokongwei. The taipan disliked the idea of another taipan taking over from him as if he failed.

    Harry, the taipan’s pragmatic brother who constantly trouble shoots for him, told me that they also approached Qantas last year for some kind of a deal. Qantas was looking for an Asian hub to make them more competitive in the fastest growing airline market. But Qantas was intimidated by the labor problems of PAL, as it was also deep into labor problems in its home market.

  5. Why PAL deal took so long
    By Boo Chanco

    PART 3

    RSA had mixed feelings about getting into PAL. In one lunch meeting we had, he said that his financial team had done the due diligence and were cautious about recommending a buy. So RSA said that he was just going to help the taipan as a friend. But it was obvious RSA wanted the airline badly, partly because he was a pilot and a mechanic and in his own words, “I understand what it takes to run that airline.”

    With the transfer of management control over the two airlines to San Miguel, the staff can heave a sigh of relief. The anxiety over the fate of the two airlines has caused some senior staff to reconsider career options.

    A senior foreign consultant who worked with PAL and was helping AirPhil get competitive has reportedly resigned and joined up and coming budget carrier Zest Air. Industry grapevine is full of rumors that several more senior staff in both airlines will move to Zest Air. Alfredo Yao, Zest Air’s owner wants to make a strong bid for market share. He already has more planes than AirPhil but flies less passengers.

    Given the tricky internal situation in the taipan’s camp, it would be very interesting to see if this partnership with San Miguel will work. But it now helps that the taipan seems ready to just collect the profits as others run his businesses, first with Philip Morris taking over Fortune Tobacco and now San Miguel managing PAL. Now in his late 70s, the taipan needs to ensure continuity and maybe even clear up lines of succession to prevent business disruption if he suddenly dies or gets incapacitated.

    If there is one person who can navigate this delicate situation, it is Mr Ang. Decisive but always amiable with his principals, RSA should be able to steer clear of the minefields resulting from the internal struggles within the taipan’s families.

    The final document may have been signed to allow the entry of San Miguel in PAL and AirPhil Express. But I don’t think the internal struggles are over. It remains to be seen what concessions RSA gave to make everyone happy, specially the taipan’s first family who fought hard to keep him from getting PAL and caused the delay in its eventual acquisition by San Miguel.

  6. Why the Delay?
    By Doris C. Dumlao

    San Miguel Corp.’s entry as tycoon Lucio Tan’s partner in Philippine Airlines nearly hit a snag Tuesday last week as the “frenemy”—backed by some family members and senior advisers—presented an offer that was hard to refuse. The alternative bid was to the tune of $800 million, according to the reliable grapevine, although it was not clear whether this was an improvement over the frenemy’s $700-million offer for a controlling stake or an attempt to top SMC’s quest to buy 49 percent of PAL (plus affiliate budget carrier Air Philippines).

    All was set for a deal signing in the afternoon of April 3 but because of the last-minute juicy offer, the Tan family did pause to rethink and the signing ceremonies in Century Park Hotel were called off. One senior adviser was said to be really adamant to get SMC out of the picture because a hefty brokering commission was allegedly at stake. Thus, no signing occurred in the afternoon, leading some people to believe that the Kapitan needed more time to think about letting the group of SMC chief Ramon S. Ang on board the national flag carrier.

    In the end, however, Kapitan and brother Harry Tan decided to honor an exclusivity agreement with SMC and the rest is history. The deal-signing did occur in the evening, when there were no more media around to hound the parties. This race to the skies is thus officially concluded.

  7. PAL Holdings boards quit

    A week after San Miguel Corp.’s (SMC) investment in the flag carrier was made public, the board members of Philippine Airlines (PAL) and its holding company PAL Holdings Inc. submitted their courtesy resignations.

    “We agreed that it was just right to do so, given the new management that will take over. Almost all from the senior management level submitted courtesy resignations last week,” said a board member. According to the official, PAL has 15 board members and 11 for PAL Holdings.

    PAL Holdings is the holding company that controls majority shares of the flag carrier. The 11-man board consists of Lucio C. Tan, Harry C. Tan, Jaime J. Bautista, Lucio K. Tan Jr., Michael G. Tan, Domingo T. Chua, Wilson T. Young, Juanita Tan Lee, and independent directors Antonino L. Alindogan Jr., Enrique O. Cheng and Johnip G. Cua.

    The list of PAL board members posted on its web site includes the following: Alindogan Jr., Cheng, Alberto D. Lina and Gregorio T. Yu as independent directors. Other members are Charles C. Chante, Joseph T. Chua, Estelito P. Mendoza, Cesar N. Santos, Washington SyCip, Lucio K. Tan Jr. and Michael G. Tan.

    Lucio C. Tan is the chairman and chief executive officer (CEO) of both PAL and PAL Holdings, while Bautista sits as the president for both.

    Other PAL officers include Harry Tan as vice chairman and treasurer and Henry So Uy as the deputy CEO.

    PAL Holdings CFO, meanwhile, is Susan Tcheng-Lee while the corporate secretary is Cecilia Pesayco.

    Under the investments agreements signed by SMC on April 3 with business taipan Lucio C. Tan, the same official disclosed that the concurrent PAL president and chief financial officer (CFO) would be replaced by people from SMC; the concurrent chairman and treasurer of the flag carrier will be retained.

    There is no word yet if there would be further changes within the company. “There is no board meeting yet. What is clear is that only the president and CFO positions would have to be vacated,” said another official. It was not clear if SMC would replace the president and CFO of Air Philippines Corp. as well.

    The investment agreements would result in the issuance of new shares to the diversified conglomerate for a minority stake in PAL and low-cost partner Air Philippines, which operates Airphil Express.

    Under the agreements, Trustmark Holdings Corp. (Trustmark) and Zuma Holdings and Management Corp. (Zuma), the holding companies of PAL and Airphil would issue new shares to San Miguel Equity Investments Inc. (SMEII), a wholly-owned subsidiary of SMC.

    Trustmark and Zuma are majority owned by Tan.

    SMC, in a disclosure yesterday, said SMEII subscribed to newly issued shares in Trustmark and Zuma, and such subscriptions correspond to a 49-percent equity interest in Trustmark and Zuma.

    It added that SMEII would not have a direct equity interest in PAL Holdings; rather it will have resulting proportionate interest in PAL Holdings and PAL, as well as in Airphil, to the extent of its investment in Trustmark and Zuma, respectively.

    SMC’s investment in this deal is worth $500 million. “The investment was based on the enterprise value of PAL and Airphil taking into account a discounted cash-flow analysis of the ongoing business of PAL and Airphil.”

    As previously disclosed, the investment by SMC, through SMEII, provides an opportunity to diversify into an industry, which has synergies with the company’s existing businesses. “Such investment will likewise augment and supplement the ongoing enhancement of the operations of in PAL and Airphil, and the implementation of the fleet modernization programs with the end view of enhancing the efficiency, competitiveness and profitability of PAL and Airphil.

  8. Ramon Ang has taken over as President and Chief Operating Officer of Philippine Airlines (PAL).

    Ang replaces Jaime Bautista, who resigned from his post as officer and director of PAL Holdings Inc. in a disclosure to the Philippine Stock Exchange on Friday, April 20.

    Elected Directors are former trade minister Roberto Ongpin, Inigo Zobel, Aurora Calderon and Ferdinand Constantino.

    Taipan Lucio Tan remains as chairman.

    Newly appointed officers of PAL are:

    Harry Tan - Treasurer
    Estelito Mendoza - Corporate Secretary
    Ma. Cecilia Pesayco (previously Corporate Secretary) - Assistant Corporate Secretary
    Irene Cipriano - Assistant Corporate Secretary
    Daniel Ang Tan Chai - Chief Finance Officer