Business World
Wednesday, December 9, 1998
Merger talks between Philippine Airlines. Inc. (PAL) and Hong Kong-based Cathay Pacific Airways Ltd, are said to have been revived and the final results will be known within the week.
In a radio interview yesterday morning, Finance Secretary Edgar Espiritu said talks were reopened after President Estrada spoke with a Cathay official on the telephone last Sunday.
However, Cathay Regional Manager for Taiwan and the Philippine Peter Foster would neither confirm nor deny what Mr. Espiritu said, He merely told Business World in a telephone interview there has been no “direct-“ contact between the (PAL and Cathay) since the breakdown of their two-month- long talks last week.
"I can only confirm that we are not engaged in any direct talks with the PAL management. As for talks with other parties, I am not at liberty to comment on that, “he said.
Mr. Espiritu said both the government and PAL are determined to find a partner for the flag carrier within this week to appease its foreign creditors.
"The President was able to speak on the telephone with a Cathay official involved in the negotiations. I could say that the discussions have been revived and we will know the results within two to three days,” Mr. Espiritu said in the vernacular. “We are hoping the talks can be concluded within the week so the creditors will stop worrying," he added.
“We are still willing to renegotiate,“ Mr. Estrada told reporters in an ambush interview. He had earlier asked for a meeting last Sunday with Cathay officials and PAL Chairman Lucio Tan. However, Cathay representatives failed to show up.
THORNY ISSUE
A thorny issue which must be resolved by both parties is the schedule of capital infusion. Mr. Espiritu during his radio interview., said Cathay, which reportedly is willing to raise as much as $100 million, will give the amount next April but it wants an "immediate take over” of the flag carrier.
PAL, based on the rehabilitation plan it submitted to the Securities and Exchange Commission last Monday, said it needs $150 million to finance its rehabilitation.
Mr. Espiritu said Cathay’s demand may be borne out of the fact that the rehabilitation plan will take some time to be completed. The projection is that the plan will be finished by February or March.
But he expressed optimism that this time, the talks will make progress, saying the issue on management control—one of the reasons for the collapse of earlier talks—can be easily resolved.
“The basic issue was on the constitutional limitation on the participation of foreigners in the policy decision making. Conflict arose after the strategic partner wanted to have the final say over the board, on how to run PAL. But this may be sensitive because we may be violating the Constitution,“ Mr. Espiritu said.
To appease Cathay, Mr. Espiritu said PAL is “now looking for ways to assure foreign investors provisions in the Constitution will not be invoked on the management takeover.”
WILLING TO GIVE WAY
He also assured that PAL stockholders are willing to turn over control to Cathay. “If it involves the day-to-day management, they, the present PAL stockholders, are ready to give way. And if Cathay will be informed about this…..the Cathay (takeover) may push through,” he said.
The Finance secretary who heads an interagency task force on PAL, said reports claiming the talks collapsed allegedly due to Cathay’s insistence to lay off workers are inaccurate—there is no need to retrench workers since a voluntary separation program is already in place , as agreed by PAL and its employees during referendum last October.
The Finance chief also said a number of investors, including the World Bank’s International Finance Corp, are willing to invest should the PAL-Cathay deal pushes through.
He said the government financial institution (GFIs) will also contribute their share, provided PAL has a new partner. “(But) I would like to clarify that the GFIs (on their own) will not invest capital in PAL, ayaw na nila (they no longer want to).” He said a possibility is for the GFIs to grant a loan, but only if a new partner comes in. “On a credit evaluation basis, the GFIs and other banks can provide bridge financing while PAL is waiting for the capital infusion of the new partner,” he said in Tagalog.
If the PAL-Cathay talks will not prosper, PAL can still turn to other airlines, Mr. Espiritu said, adding that the flag carrier has been conducting “preliminary” talks with Singapore Airlines.
A Business World source at PAL said the flag carrier is now talking to at least two major groups of investors to add both equity and expertise.
The source claimed management is negotiating with “a Filipino group” and a foreign airline investment firm to put up $60 million for the flag carrier’s rehabilitation. A group led by Mr. Tan is said to be ready to contribute $90 million of the $150 million needed to finance PAL’s rehabilitation.
Presidential spokesman Fernando Barican, at the same time, reiterated the government will not use the taxpayer’s money to bail out PAL.
SEVERAL FACTORS
“The bridge financing referred to by Finance Secretary Edgar Espiritu will depend on several factors: that PAL’s continued operation is commercially viable; that the usual credit evaluation will be administered; the financing package will involve a consortium of private banks and strategic partners; and the financing package will form part of the rehabilitation plan approved by PAL creditors and Securities and Exchange Commission,” he said.
Mr. Barican added that the President is confident these conditions will be met to pave the way for the bridge financing.
TO BE DISCUSSED
For their part, the GFIs said they will have to discuss among themselves Mr. Espiritu’s suggestion.
For one, a senior official of the Government Service Institute System (GSIS) said the proposal will have to be approved by their board.
“GSIS president Federico Pascual can only recommend to the board. He has to secure the board’s approval. The board goes over the granting of loans and disbursement of funds. We have not seen the rehabilitation plan,” he said.
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