Why PAL deal took so long

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.

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.

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.

JICA

Also over the long weekend, we got word that Japan has approved P35.5 billion worth of infrastructure projects through JICA, Japan’s development assistance agency. The amount is a 34 per cent increase from the previous fiscal year.

Philippine Ambassador to Japan Manuel M. Lopez and Japan International Cooperation Agency (JICA) Vice-President Izumi Arai signed the agreement that covers seven projects. The projects aim to improve logistics transportation; protecting Metro Manila from flooding of the Pasig-Marikina River and mitigating flood risks in the Cagayan, Tagoloan and Imus river basins; supporting community based forest management in Luzon and Panay; and improving agricultural productivity and food security of farmers.

Ambassador Lopez expressed appreciation for Japan’s continued support for the Philippines despite the fiscal challenges posed by Japan’s recovery and reconstruction efforts after the Great East Japan Earthquake and tsunami.

Now that the funding for these needed infrastructure projects are already available, it is hoped that our officials will move quickly to get these projects going. With an election year ahead of us, there is no time to lose. As the Aquino administration approaches its halfway mark, people are still wondering if it will be able to deliver enough infra projects like these.

P-Noy’s economic managers must realize infra projects take long to complete. It would be a pity if these and many similar projects under PPP will not be delivered before the end of P-Noy’s term in 2016. The ball is now in P-Noy’s court. It is up to him to crack the whip to get his economic managers moving beyond feasibility studies.

Lent

One last classic joke for Lent.

On their honeymoon, the bride slipped into a sexy nightie and with great anticipation, crawled into bed, only to find her husband had settled down on the couch.

When she asked him why he was apparently not going to make love to her, he replied, “It’s Lent.”

In tears, she sobbed, “Well, that is the most ridiculous thing I’ve ever heard! Who did you lend it to, and for how long?”

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