MVP offered to buy 100% of PAL?

The last time I talked to Manny Pangilinan over the Christmas holidays at the Baguio Country Club, he admitted that he is “under pressure” to buy Philippine Airlines. He didn’t say from whom. But he did say that while he finds the airline interesting, and I could sense he is raring to acquire it, he also said he is bothered by the thought of a legacy airline’s future in a world that clearly belongs to low cost carriers.

I just got word that MVP finally took the plunge and offered to buy 100 percent of the airline. He submitted his written proposal to Lucio Tan during a meeting at the Century Park Hotel Business Center early this week. His proposal is being supported by Washington SyCip who advices the controversial taipan and the taipan’s son-in-law who runs MacroAsia, Joseph Chua. Mr. Ang is reportedly being supported by Lucio’s brother, Harry and brother-in-law Domingo Chua.

Mr. Ang has supposedly already signed a memorandum of understanding with the taipan to buy 49 percent of the airline with full management control but with the taipan retaining the title of Chairman. The taipan was reported to be inclined to honor his word to Mr. Ang but the fact that the MOU has not progressed to a final contract over the past six weeks or so indicates a serious discussion among the taipan’s family members and advisers on what to do next.

I am told that the taipan is not inclined to lose majority control of the airline. He was said to have remarked to close family members and aides that losing control of PAL will make him a nobody… a “ping ren” or the Mandarin for “ordinary person.” Ang’s offer is valued at $500 million while Mr. Pangilinan’s is supposed to be $700 million, according to Forbes magazine and the Indonesian tabloid Tempo (but my source insists MVP’s written offer was only for $500 million). Mr. Pangilinan’s 100 percent buy out offer calls for the entire amount being given to Mr. Tan and that’s the end of it for Mr. Tan in PAL. Mr. Ang’s 49 percent offer leaves a role for Mr. Tan but the money goes directly to buying new planes.

Philippine Airlines is known to have serious financial needs. The cost of that FASAP decision of the high court will be in the neighborhood of P2 billion. Then there is the matter of re-fleeting that has assumed some element of urgency with the announcement of Cebu Pacific that they will launch long haul flights to cities where there is a strong demand from the Filipino community. CebPac made the announcement in anticipation of our being able to recover our Category 1 status with the US FAA towards year end. John Gokongwei has also told us some years ago that he wants Cebu Pacific to fly the trans-Pacific routes, an idea that his son Lance didn’t seem enthusiastic about until now.

It is curious that this formal offer from MVP to buy PAL came despite his public statements that it would be awkward for him to be in PAL now that the Gokongweis who run Cebu Pacific are in his board at PLDT. I reminded him about this when we briefly talked at the Baguio Country Club and to my surprise he said that on the other hand, there could by synergies. He quickly said however that getting PAL and Cebu Pacific together could cause serious regulatory problems. I agreed, saying it would be a worse fight with government regulators than what he experienced in getting approval for PLDT and Digitel to get together.

I was thinking that maybe, the Gokongweis are now behind MVP in this bid to control PAL if not directly, at least with enough moral support that would be eventually rewarded by a more cooperative competitive environment between the two airlines, in other words a duopoly which requires no government clearance. PAL has more routes than it could afford to take full advantage of and there is still a role for a full service airline. In an era when airlines are consolidating or working together in alliances, an economy as modest as the Philippines may even benefit from having national flag carriers that are not only better managed but have greater economies of scale.

But then, I understand Lucio Tan made a stipulation in his discussions with prospective buyers not to flip the airline to another local taipan. I guess it is a matter of hubris on the part of Mr. Tan. If MVP gets PAL with Mr. Gokongwei’s support, it would look like Mr. Tan failed and had to be bailed out by a rival taipan. I wonder if that’s a stronger consideration for Mr. Tan than simply getting $700 million in cold cash from MVP for a problematic asset.

Whoever finally gets to control Philippine Airlines, MVP or RSA, it should happen as quickly as possible. The airline cannot long survive its current state of flux. It needs huge amounts of financial resources that the taipan no longer wishes to provide. The airline also needs a new management that is more able to plan for the long term and can gather the resources and the expertise to properly run the airline in this increasingly competitive environment. A Philip Morris solution, the strategy the taipan used to handle his tobacco operations, is clearly the way to go with the airline as well.

I understand that both MVP and RSA want to fold in Airphil Express into any deal on PAL. While that sounds reasonable in the light of Airphil’s dependence on PAL, the reduction in the number of players in the market may be problematic. Whatever happens, and hopefully soon, should be something that’s good for the country. The regulators will have to make sure we don’t end up with a near monopoly which, given PAL’s many years as such, is actually at the root of PAL’s present problems. Monopolies not only become abusive to consumers but end up with a fat bureaucracy and uncompetitive business practices. That’s something government regulators should guard against.

MRT/LRT

At last, something is stirring at DOTC. Sec. Mar Roxas said the blueprint for LRT-1 extension southwards from Baclaran to Cavite is now with the National Economic and Development Authority (NEDA) and likely to hurdle approvals soon. He added that the government was now working on the terms of reference and might be able to bid out the PPP project for the design and construction of the 12-kilometer LRT expansion to Cavite by March or April this year.

Sec. Mar said the vision is to harness private sector money to build the railway extension with the help of land right-of-way acquired by the government. “Subsequently, the government, through ODA [official development assistance], will then bid out the rolling stock and once that’s completed, it will be added to the inventory of vehicles that will ply the route,” Roxas said. “Whoever wins the design and construction contract will also win the O&M [operation and maintenance] of the entire 28-kilometer railway,” he said.

My source said he is keeping his skeptical fingers crossed, but confirmed that LRT1 extension was indeed submitted by DOTC to NEDA. It is a revival of the IFC recommendation in 2006. If true, my source said, Mar Roxas has made a 180 degree turn from his hybrid ODA-PPP a few months ago. Mar probably realized this is the faster way of getting the project up and running just as we said here.

Another source wrote on the same subject expressing hope things move on the Cavite Extension for Line 1 and the Line 2 Extension to Masinag. “They have been dragging slowly with the changes in the various national and DOTC administrations and re-direction with regard to funding. LRTA does seem to be trying to get these projects moving again now. At least there is some hope here.

“With regard to the ODA issue, such a program normally requires a gestation period of one to two years before a loan can be programmed with JICA or World Bank. Chinese government loans can be processed quickly but then we are stuck with possibly unacceptable conditions as in NorthRail. The Koreans are relatively new players on the Philippine ODA scene and could possibly be worth pursuing but with the GOP constantly changing direction in regard to funding, nobody can say what is going on.

“The GOP seems to have lots of government funds so direct government funding may also be a good choice. The Line 1 North Extension Project (to Trinoma) was done that way and proved to be one of the cheapest rail projects around and it was completed pretty much on schedule. A very unusual government project here!”

Politicians

According to a quote sent by Lito Balquiedra, politicians are people who, when they see light at the end of the tunnel, go out and buy some more tunnel.

Boo Chanco’s e-mail address is [email protected]. He is also on Twitter @boochanco