San Miguel, the Philippines' most diverse conglomerate, said it will buy minority stakes worth a total USD$500 million in flag-carrier Philippine Airlines and a sister airline, extending its business reach as it seeks to out-grow the local economy.
The deal is the first partnership between San Miguel and its main brewing rival, billionaire Lucio Tan, who owns Asia Brewery and Tanduay Holdings.
Under the deal with Tan's Trustmark Holdings, San Miguel will take indirect stakes of 40 percent in Philippine Airlines (PAL) and 49 percent in its low-cost partner Air Philippines, also known as Air Phil. San Miguel, valued at USD$6.4 billion, will gain management control of PAL, the country's biggest airline.
Asked when San Miguel will take over the carrier's operations, company president Ramon Ang said in a text message: "After the (Easter) holidays."
Carlos Jalandoni, vice president at BPI Asset Management, said the deal gives San Miguel new distribution channels for its food and drinks business. Previously, Tan didn't allow his rival's drinks on Philippine Airlines' flights.
"Obviously there are synergies: food, airlines, consumer, but a minority stake is unusual," Jalandoni said. "Now the question will be: is this an initial step to something bigger?"
San Miguel's investment will be used to help upgrade PAL's fleet and expand operations to better compete with budget operators such as Cebu Air.
PAL has been hit by rising fuel costs and staff problems, and lost USD$33.5 million in October-December. Cebu Air posted net income last year of USD$84.3 million, though that was down by almost a half from 2010.
San Miguel's entry into the airline business is likely to have been triggered by the growth potential of the Philippines' tourism industry. The government is targeting 10 million visitor arrivals by 2016, up from nearly 4 million last year.
"They're banking on tourism... on making the airline more efficient the same way Cebu has done," said Fitz Aclan, senior assistant vice president at BDO Trust in Manila.
It wasn't immediately clear how San Miguel would fund its airline ticket. The group has sought a loan equivalent to USD$800 million to complete the USD$577 million acquisition of a majority stake in Esso Malaysia and of both ExxonMobil Malaysia and ExxonMobil Borneo.