San Miguel in talks with Cayman Airways

Posted at 11/14/12 9:45 AM

MANILA, Philippines - Southeast Asia’s largest conglomerate San Miguel Corp. is in talks with the Cayman Islands government for a possible investment in the latter’s flag carrier Cayman Airways.

The Cayman News Service reported that San Miguel offered to acquire a substantial stake in Cayman Airways worth around $25 million. It cited a statement issued by Premier McKeeva Bush to the Legislative Assembly, which said that Cayman Airways and San Miguel are jointly exploring a potential collaboration on several areas including the ability to code share and provide aircraft operations.

The investment being discussed involves the purchase of preferred shares of Cayman Airways by San Miguel, which owns a controlling 49 percent equity stake in loss-making Philippine Airlines (PAL). The transaction would reportedly result in San Miguel acquiring as much as 49 percent of Cayman Airways.

PAL president and chief operating officer Ramon S. Ang in a text message sent through a spokesperson confirmed ongoing talks with Cayman Airways and the Cayman Islands government.

“Yes we are currently in talks with Cayman Airways and Cayman Islands government for a number of investment opportunities,” Ang said in the text message.

In June, Ang said it was looking at entering into an agreement with a regional airline as a way to go around the four-year long ban imposed on local airlines to add flights to the US since the Philippines was placed under the Category 2 by the US Federal Aviation Authority (FAA).

“There are some airline(s) in the region being offered to us for joint venture or an acquisition so we are at the moment evaluating their offers,” San Miguel Corp. president Ramon Ang told reporters at the sidelines of the conglomerate’s annual stockholders meeting on June 14.

“We are not resting and we are evaluating all these opportunities being offered to us,” he previously told the company’s stockholders.

Premier Bush, however, noted that any agreement to sell shares would require the approval of Cabinet, the Legislative Assembly and eventually the United Kingdom since Cayman Islands is a British overseas territory.

A preferred share refers to a class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. It is similar to a debt instrument but do not normally come with voting rights.

The preferred shares would also earn a specified annual dividend that increases year after year.

According to Cayman Airways, this “non-voting class of shares allows holders a guaranteed return, but generally does not allow for any involvement in operational or administrative functions and would allow the airline to raise needed capital while allowing the Cayman Islands Government to maintain complete control.”

The report, however, said that negotiations were preliminary and nothing has been finalized yet.

Discussions reportedly include a possible investment by San Miguel to redevelop the aerodrome in Little Cayman to accommodate aircraft in the 30-50 seat range.

The Cayman Islands government said Cayman Airways and the Cayman aviation sector are expected to benefit from an investment by San Miguel Corp.

Cayman Airways was formed following the Cayman Government’s purchase of 51 percent of Cayman Brac Airways, from LACSA, the CostaRican flag carrier, and became wholly government owned in December 1977. It struggled throughout the early 1990s, however financial assistance from the Cayman Islands Government, financial re-structuring, a new fleet and the addition of new destinations (Chicago, Boston, Fort Lauderdale and Havana) have helped the airline to stay afloat.

For the first time in its history, Cayman Airways swung to profitability in the quarter of this fiscal year (July-Sept).

San Miguel earlier said it was looking to acquire a regional airline to help PAL launch more long-haul flights despite the country’s “serious safety concern” status with the International Civil Aviation Organization.

The Philippines has category 2 rating, which means local airlines are banned from expanding operations in the United States and from the 27-member European Union due to its failures to comply with international safety standards.

PAL recently bought six new long-haul Boeing 777-300ER aircraft, but the FAA downgrade, has deterred the airline from flying them to the United States. The Cayman Islands has a Category 1 rating.

PAL has suffered from high jet fuel prices in recent years and tough competition from its main rival, budget carrier Cebu Air. Labor disputes has also contributed to the airline’s woes.

San Miguel aims to nurse PAL back to health with plans to mount new flights to new destinations including the Middle East, Europe and other parts of the United States to expand its global reach and swing to profitability in two years time.

The conglomerate is banking on new businesses to fuel its growth as it moves away from its traditional food and drinks businesses. It aims to hit $20 billion in annual sales this year, three years ahead of its 2015 target mainly on the back of continuous expansion in new businesses. In the near term, San Miguel is hoping to post P1 trillion in revenues.