Lucio Tan may snap up 76% of PNB

The Philippine government will decide on Friday whether to sell its 30% stake in the Philippines'' largest troubled lender to its biggest shareholder.

Lucio Tan could soon be the proud owner of Philippine National Bank. Tycoon Tan put in a bid to buy the governmentÆs 30.4% stake in PNB, PhilippinesÆs fourth largest lender, for Ps6.27 billion ($140 million). He was the sole bidder for the governmentÆs stake on 18 July. The nationÆs privatization committee and the central bank are due to vote on his bid on Friday, analysts say, and Tan is not expected to lose.

TanÆs offer values the bankÆs shares at Ps100 per share, 25% more than the governmentÆs minimum asking price. If his bid is accepted, Tan will end up with a 76% stake in the bank û Tan already owns 46% of the bankÆs shares.

Many analysts believe the government will accept, given that its attempt in June to put the bank on the block failed miserably. It is imperative for the government to do so. PNB wants to raise between Ps10 billion and Ps20 billion in a rights issue that is scheduled for September, and the government simply canÆt afford to recapitalize the lender.

As analysts in Manila say, the Philippine government has not got a lot of choices. The Philippine government needs funding from the International Monetary Fund to bank roll its budget deficit. It will not get those funds unless it offloads its stake in the troubled bank. But if it sells its PNB stake at too low a price, it would be sacrificing the money it was depending on to supplement its funding needs. TanÆs bid, which is 25% more than the government's asking price, gives it a useful exit strategy.

ôHeÆs [Lucio Tan] paying a pretty acceptable price for the governmentÆs stake. ItÆs a win-win situation for all parties concerned. Tan gets management control of the bank, the government gets its money and fulfills its obligations to the IMF, and PNB can rest assured that it raises much-needed capital,ö says Bradford Ti, analyst at Salomon Smith Barney in Manila.

The bidding process itself was fraught with tension. It looked like no bid was going to be made at all. Tan's last-minute entry came as a surprise. ôI really thought no one would bid,ö says Lenore Dela Rosa, analyst at GK Goh Securities in Manila. ôLucio Tan is paying big premium for a bank with such a poor credit history and massive bad loans. He could have bought the shares for much, more lower in the market. I canÆt see the government turning him away."

A costly face-saving exercise

Lucio Tan saved the government a lot of face when he submitted his bid, but analysts point out it could prove a costly measure. ôHis spending bill on PNB will likely rise to Ps25 billion with the rights issue,ö says SalomonÆs Ti.

Ti estimates Tan's equity stake in PNB has an average cost of Ps100 per share û that includes both the portion he owns and the 30% he is hoping to acquire. The right issue cum warrants issue will raise another Ps10 billion, cutting his basic costs down to at least Ps25 billion.

Under PNBÆs capital-raising plan, existing shareholders with five shares will get six new shares and warrants. The board has not decided on the number of warrants it will issue or their conversion price. PNB has also proposed to reduce the par value of its shares from Ps100 per share to Ps60 per share. ThatÆs because with PNB trading between Ps50 to Ps60 per share, there would be no incentive for existing shareholders to support the rights issue at par value (Ps100).

Despite the heavy price tag û he will be paying for both the government's stake and the bank's recapitalization û Tan's immediate financial burden will be eased. In its desire to walk away from PNB with no more egg on its face, the government said it would allow any buyer to pay for its stake in installments.

Tan took up that offer. Even though he must pay Ps6.27 billion for the stake, he only needs to put down Ps600 million immediately. The remainder he proposes to pay in two years' time, without any additional interest payment attached. But he will need to back that commitment with a guarantee or a letter of credit from a bank, at least, analysts say.

ôThe question everyone is asking is, where is he getting his letter of credit from?ö says GK GohÆs Dela Rosa.

Two names keep popping up: Allied Banking Corporation, another banking institution that he controls, or PNB itself.

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