Investors snap up SM Prime shares on merger rumors

Posted at 02/20/13 8:08 AM

MANILA, Philippines - The family of retail tycoon Henry Sy is mulling a proposal to merge its mall and property development businesses to create a real estate behemoth that could topple Ayala Land Inc.

SM Investments Corp. chief finance officer Jose T. Sio said the group is studying a proposal broached by some investment banks to merge SM Prime Holdings Inc. and other SM property groups.

“We’re studying the suggestion,” Sio told The Star. He, however, declined to give more details as everything is still under study.

The Sy family conducts its property business through SM Development Corp. which handles the group’s residential construction business; SM Land Corp. (the property development arm of the SM group which has captured a substantial share of the BPO business), and Tagaytay-based upscale leisure firm Highlands Prime Inc.

It also owns a controlling stake in leisure developer and gaming firm Belle Corp.

Analysts said the proposed consolidation, if approved, would form a super company that would dominate the property market as well as benefit from economies of scale and a stronger asset base.

SM Prime, which ended 2012 with a total of 46 malls in the Philippines and five in China, has been one of the major cash cows of the SM Group, accounting for a quarter of total earnings. Its market capitalization stood at P328.01 billion as of yesterday.

SMDC, on the other hand, is one of the fastest-growing property firms in the country. Though it has grown over its 16-year history, it has remained a second-string player.

Analysts said the consolidation makes a lot of sense as this would not only improve cost efficiency but but also enhance financial flexibility. The merger, they said, can also result in increase in market share and increased value generation.

“Just look at Ayala Land and Robinsons Land, their shopping mall, residential, office and hotel development businesses are all lumped together allowing them to generate more value than the separate firms,” a analyst at a local brokerage house said.

“A merger is beneficial when a firm wants to gain higher competitiveness and improve profitability,” the analyst added.

Ayala Land has a market capitalization of almost P425 billion while RLC's market capitalization is P90.47 billion. SM Prime, on the other hand, has a market capitalization of P82 billion.

Sources said the proposal has met opposition from some members of the Sy family and has reportedly even created conflict or animosity among the siblings.

SM Prime is headed by Hans Sy while SMDC is led by Henry “Bigboy” Sy Jr., who also has other businesses separate from those of the family’s.

SM Prime continues to post steady growth with its 2012 profit hitting P10.53 billion, topping its forecast for a second straight year on the back of new store openings and higher same store sales. It is seen to easily surpass last year’s earnings as the national elections in May is expected to boost consumer spending, which accounts for 70 percent of the $225 billion economy.

SMDC, on the other hand, has reportedly seen some slowdown in sales amid stiff competition in the industry. In the third quarter of 2012, net earnings fell 47.7 percent to P606.59 million as sales declined to P4.2 billion from P4.42 billion owing to higher expenses.

Increased marketing and selling expenses and brokerage fees and commissions pushed up SMDC’s operating expenses to P1.02 billion, up 64 percent from P622.35 million.

Shares of SM Prime rallied to a new record high yesterday, closing at P19.28 per share or 2.12 percent higher than Monday’s close of P18.88.

Sister unit SMDC, on the other hand, slid by 3.73 percent to settle at P8.52 yesterday. The stock, however, has risen by as much as 42 percent since the start of the year.