Government now free to sell shares to San Miguel costing P83.7B

The government can now sell its preferred stocks in diversifying conglomerate San Miguel Corp. (SMC) following an affirmation from the Supreme Court that these assets belong to coconut farmers.

And if the government were to bid out these preferred stocks, SMC’s controlling stockholder group, Top Frontier Investment Holdings Inc., which is 49-percent owned by SMC itself, will make a pitch for it, SMC president Ramon S. Ang said.

“Yes, (we) will always join bidding in any government sale,” Ang told the Philippine Daily Inquirer Wednesday, when asked about Top Frontier’s interest in the government block in SMC.

Top Frontier likewise holds the option to buy an additional 493.37 million common shares in SMC from tycoon Eduardo “Danding” Cojuangco Jr. for P37 billion. It was earlier reported that the SMC chair had made plans to unload his entire 15-percent equity interest in SMC and has given Top Frontier the option to buy him out until Nov. 19, 2012.

The 753.8 million shares previously equivalent to 24 percent of SMC’s voting stock was converted into preferred shares of the same number in 2009 which SMC has the option to redeem this year.

“The SC’s affirmation does not directly affect the capital structure or ownership of SMC. What it may imply, however, is that the government is now free to sell its SMC preferred shares subject to any motion for reconsideration that may be filed,” said Jose Mari Lacson, head of research at Campos Lanuza & Co.

Costly shares

Lacson estimated that the government can raise around P83.7 billion from a prospective sale of these preferred shares and that it would make sense for SMC itself to buy them.

“The preferred shares are costly. It depends on SMC’s capital management strategy, if they view a reduction of cost in capital as a primary consideration,” he said.

On the other hand, he said other investors could also bid for these preferred stocks, which have an attractive coupon rate of 8 percent, but at the risk of SMC exercising its option to call or redeem those shares this year.

Lacson said SMC has the option to redeem those shares this year or issue another set of preferred shares at a lower borrowing rate. Over the years, he said SMC had tried to boost returns by investing in new industries but had not resorted to capital management initiatives. As such, he said this would be an opportunity to rethink its capital structure.

The preferred stocks which are listed on the Philippine Stock Exchange closed at P78.5 per share yesterday, only slightly higher than the P75 price per share when the common shares were converted in 2009.

“It hasn’t appreciated primarily because of (limited) liquidity. So if government will sell it, it can’t sell at the market price today because it doesn’t reflect the true yield,” Lacson said, adding that the prices of these preferred stocks should have appreciated since then because interest rates have gone down sharply.

Politically sensitive

Lacson estimated that these shares should now be valued at around P111 per share, implying a price tag of P83.7 billion for the government’s interest in SMC.

The coco levy issue has been an overhang on SMC because the government’s stake in the conglomerate had been generally viewed by investors as “politically sensitive,” other stock analysts said, explaining why its shares have not significantly benefited from its inclusion in the MSCI index in late 2011.

But if the government were to sell its stake, it is thus seen lifting such overhang on SMC while helping the government raise additional funds for its infrastructure spending.