The government hopes to sell the bonds in the first quarter of next year, backing them with a 27% stake in the country's largest food and beverage conglomerate. The bonds would be convertible within three to five years. The government's finance secretary, Jose Pardo, says nearly a dozen investment banks, including Goldman Sachs, HSBC, Credit Suisse First Boston, Salomon Smith Barney, ING Barings and Lehman Brothers, are pitching to arrange the sale, despite the problems that such a deal will carry with it.
The problem is, no-one in the Philippines can agree on who actually owns the San Miguel stake, which was sequestered by the government of former President Corazon Aquino after it allegedly discovered the stake may have been illegally acquired by Aquino's predecessor, Ferdinand Marcos, with taxes levied on coconut farmers, who now claim the stake is rightfully theirs.
"We think there will be very little investor interest in this bond because the share ownership issue has not been resolved," says Hazel Dela Cruz, an analyst at Orion-Squire Capital. "There's a risk that the bond holder's only option will be to wait until the maturity date, and the terms of the bond would have to be very attractive to compensate for that risk."
Last month, the Sandiganbayan anti-corruption court ruled that the San Miguel stake could not be sold until the ownership dispute is settled in court. The government maintains it has every right to sell the bonds, though, just as it's possible to sell options on un-owned stock. The mere fact that it's legal, however, doesn't make it attractive. Any buyer would be betting not just on San Miguel's stock but on settlement of the dispute.
San Miguel would ideally like to see the stake sold to a strategic investor. But even though analysts say San Miguel is attractive in many ways, with earnings expected to grow at least 7% in 2001 from an expected Ps6.9 billion pesos ($138.3 million) in 2000, it would be a political hot potato for any acquirer.
The company's chairman and 20% stockholder, Eduardo Cojuangco, was closely linked with former dictator Marcos, who escaped the country in 1986. If current president Joseph Estrada is impeached at a scheduled hearing on December 7, it's possible Cojuangco would be forced to resign, since the shares that voted him in were government shares, analysts say. On his side is the company's strong performance.
"Since taking over in mid-1998, the current management have expanded margins and improved the bottom line with double-digit growth in hostile economic conditions," says Julian Tarrobago, an analyst at Vickers Ballas.
The bond is the latest in a series of unpromising issues the government has tried to launch. In September the Department of Agriculture announced it planned to issue a $300 million bond to finance 14 irrigation projects. The department went so far as to issue a press release saying Deutsche Bank would manage the sale. Almost immediately, the Department of Finance, which has to approve the sale, issued its own statement saying it had no plans to issue Eurobonds for the agriculture department. The fate of the bond is still up in the air.
Last year, the government proposed launching a gambling-backed bond to help plug its budget deficit. Investment banks Bear Stearns and Lehman Brothers were asked to help securitize receipts from government-owned Philippines Amusement and Gaming Group. The proposition fizzled out after the government was persuaded that such a bond would hurt the country's international standing.
Perhaps the most likely candidate to buy the San Miguel exchangeable could be local tycoon Lucio Tan, who is currently barred from owning a direct stake in San Miguel as he owns competitive businesses. By buying and holding the bond on the assumption the ownership issue clears within five years, he potentially could become the company's biggest, and controlling, shareholder, with four seats on the board.
"There are a lot of rumors that Lucio Tan is interested but at this stage it's just rumor," says Tarrobago. "Who knows?"
