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KIRIN Brewery Co. Ltd. of Japan may have found San Miguel Pale Pilsen a very good brand. To it, the local beer probably tastes good if not better than its own brand.
But to the Japanese-owned Kirin group, it seems San Miguel Pale Pilsen is all that matters and gave up its 15.55 percent ownership in San Miguel Corp. (SMC) to become a direct stockholder in San Miguel Brewery Inc. (SMB). Not that SMC was a bad bet. In SMC, Kirin not only saw how SMC brews Pale Pilsen. Its ownership of 442.460 million SMC common B shares made it an insider with a good view of how San Miguel Pale Pilsen made money for the SMC group. More importantly, its SMC investment proved profitable. It received P619.584 million and P575.328 million in dividend in 2004 and 2003. That’s more than P1 billion in two years.
Then, SMC implemented a corporate restructuring plan, which was intended to transform its various business divisions into separate subsidiaries, each of these having a legal personality of its own as a stock corporation. As planned, SMC was to maintain control of the board and management by retaining at least 51 percent of voting stocks of these units. This was how it conceptualized the ownership structure of San Miguel Brewery Inc. In the beginning, SMC owned 14.524 billion SMB common shares, or 94.25 percent of 15.410 billion outstanding common shares with the rest equivalent to 5.75 percent held by the public. When it decided to keep Kirin, its long-time partner in SMC since 2001, SMC sold 6.665 billion of its SMB holdings and decided to keep 7.859 billion SMB common shares, or 51 percent, enough to maintain majority stake. Kirin thus became a significant stockholder with its ownership equivalent to 43.249 percent, which it increased to 48.39 percent that entitles it to three seats in SMB’s 11-man board. Two of SMB’s directors are independent.
With only 402.464 million SMB shares, or 2.611 percent, separating SMC and Kirin in favor of the former, this is a number that is much bigger than what the public investors own of SMB. The ownership structure posted on the website of the Philippine Stock Exchange shows the public hold only 0.60 percent of SMB’s outstanding common shares, way, way below the 10-percent minimum public ownership required under the PSE rules.
Sooner or later, SMB either has to comply with the rules or leave the market, which it can do by delisting its shares from the Philippine Stock Exchange (PSE) board. Should the company choose the first option, then it would have to contend with how it is going to have the two stockholders’ holdings diluted by so much for the public ownership to reach the equivalent of at least10 percent of outstanding. SMB still has 9.59 billion common shares of its authorized capital stock that are unissued. If it goes for additional issuances, the question is, will SMC and Kirin forego their preemptive rights as stockholders? Definitely, a gentlemen’s agreement would have no bearing on the decisions these two stockholders would take. For sure, SMC and Kirin would go for their right to subscribe to additional issuances. When this happens, which is certain to happen, the public would remain owning the same percentage which is 0.60 percent. In short, the additional issuances of SMB shares would be cause no dilution at all to the holdings of SMC and Kirin.
When the refusal of Kirin to have its holdings diluted by selling some of its SMB holdings hit the news, it did not create a stir among investors. There were no reactions from either the PSE management or the officials of the Securities and Exchange Commission who may be waiting for more developments that would require their intervention. Again, what argument would the SEC and the PSE adopt that would justify them to either intervene or request, if not order, Kirin to shave its holdings that would make the beer bottler’s ownership structure compliant with the 10-percent-minimum public ownership rule.
Kirin has been reported to be reluctant to reduce its SMB holdings by selling to the public. Apparently, it has fallen in love not only with San Miguel Pale Pilsen but with the future of SMB; it appears to be very optimistic of the future of San Miguel Brewery. After all, the P58.90 billion it has placed on SMB shares has been paying off. From P8.841 per SMB share three years ago, SMB’s price has gone up 3.845 times to P34. In addition, it has been receiving the regular annual cash dividend of P0.14 SMB has been distributing. As for SMC, being the parent and the Philippine company that has nurtured the popularity of San Miguel Pale Pilsen over the years, it should not be the one to give up any of its SMB holdings. After all, it has willingly shared the benefit of owning a part of San Miguel Brewery, of course, in exchange for P58.90 billion.
The story of what could be souring relationship between SMC and Kirin as SMB stockholders is being retold by By the Rule not for this corner to take side but to point out what is wrong with the tender offer rule. Imagine imposing on listed companies the 10-percent minimum public ownership rule and at the same time requiring them to buy out the remaining shares held by outsiders in case of a buy-in or a buyout of at least 35 percent of outstanding shares. These are two rules that contradict each other. In the case of SMB, Kirin ended up owning 48.39 percent of its outstanding capital because it complied with the tender rule and went on to buy the remaining shares held by the public.
With such rules on minimum public ownership and tender offer, what could possibly happen between now and tomorrow or the day after tomorrow, etc.?
The answer: The few owners of SMB shares may one day find themselves without a market for their holdings because one of the market’s more attractive stocks could be gone from the PSE board. Who knows? SMC and Kirin may now be drawing up plans to take SMB private again by delisting SMB shares.