San Miguel Corp. (SMC) ‘Series 2’ Preferred Shares

James Ryan Jonas

A few days ago, I drove by a Petron outlet to gas up and noticed a poster advertising San Miguel Corporation (SMC)‘s public offering of its “Series 2” Preferred Shares. There’s nothing illegal about the advertisement. SMC is a primary stockholder of Petron Corp. and they can advertise anything in any of their Petron branches.

San Miguel Corporation SMC logoWhat I found interesting and weird, at the same time, is the fact that SMC appears to be aggressively promoting the Preferred Shares. With the posters on Petron outlets, surely SMC’s goal is not to reach out to brokers and institutional investors but to individual investors like us who simply drive by a gasoline station to fuel up.

I understand that it is one way of drumming up demand especially since the offering period will be over in two weeks. I just can’t figure out if the ads mean there was lackluster reception among investors or it’s just one of Ramon Ang’s non-traditional ways to promote a financial product.

Either way, I still have yet to decide whether to subscribe to the new shares or not. Since the offering period ends on September 14, I have around two weeks to think.

SMC “Series 2” Preferred Shares

In early August, food and beverage conglomerate San Miguel Corporation announced it is offering to the public up to P80 billion worth of “Series 2” perpetual preferred shares. The base offer is comprised of 960 million shares priced at P75.00 each, with an option to issue an additional 107 million shares if there is strong demand.

Majority of the proceeds, P72.8 billion to be exact, will be used to redeem the “Series 1” preferred shares previously issued by the company. This also explains why the new shares are called “Series 2.”  SMC’s primary intent is to reduce the cost of capital, that is, to refinance previously issued high-interest paying shares by issuing new low-interest paying shares.

Capital Refinancing

Although the refinancing move is commendable, I still am not sure how it will affect the overall operations of the company. I want to see where SMC President Ramon Ang will use the interest savings.

Will he use the money to revitalize SMC’s food and beverage firms (San Miguel Brewery and Purefoods)? Or will it be used to prop up San Miguel’s real estate business?  Or is Ramon Ang still not done with his acquisition spree and would look to add more to the conglomerate’s already diversified portfolio that includes, among others, Meralco (utilities), Philippine Airlines (transportation) and Liberty Telecoms (now wi-Tribe 4G, internet provider)?

If I’ll know what SMC plans to do with the interest that they’ll be able to save, then that’s when I can know if it will be worth it to invest in the shares.

Other analysts have raised concerns regarding SMC’s ability to continue as a going concern, considering the company’s high debt leverage ratio, but I don’t think the company will become illiquid or go bankrupt in the short term.

Features of the Preferred Shares

For those interested to know more about SMC’s preferred shares offering, here are the details.

The shares are perpetual, callable, cumulative, non-participating and non-voting — features we have already explained in our article Investing in Preferred Shares vs. Bonds and Common Stock — but let’s briefly discuss them below.

The offered shares are perpetual, meaning, they have no maturity dates. Investors continue to receive dividends in “perpetuity,” but then again, the SMC preferreds are also callable.

Although the shares have no maturity, they carry a call option which entitles San Miguel Corporation the option, but not the obligation, to redeem the shares in predetermined future dates. The three series of preferred shares are redeemable in the following periods:

  • Series 2-A : after the end of the 3rd Year
  • Series 2-B : after the end of the 5th Year
  • Series 2-C : after the end of the 7th Year

The shares are cumulative, which entitles holders to receive past dividends that were not declared or were skipped. Once the Board of Directors has declared the year’s dividends, the dividends in arrears (unpaid dividends from past periods) will also be paid.

The preferred shares are non-participating, which means there are no bonus dividends regardless of a better-than-expected performance of the company.

Finally, like most preferred shares, SMC’s Series 2 Preferred Shares do not carry any voting rights.

Annual Dividend Rates of the Preferred Shares

The shares will pay a fixed cash dividend per year as follows:

  • Series 2-A : 7.500%
  • Series 2-B : 7.625%
  • Series 2-C : 8.000%
Filipino retail investors have to pay 10% withholding tax on the dividends they will receive.
Dividend Rate Step-up

In case SMC will not redeem the shares, preferred stockholders are entitled to an adjustment in the rates. This is called a dividend rate step-up. The original dividend rate will be compared to the following and, whichever of the two figures is higher, will be the new dividend rate of the shares.

  • Series 2-A : 10-year PDST-F rate, at the end of the 5th Year, plus 3%
  • Series 2-B : 15-year PDST-F rate, at the end of the 7th Year, plus 3%
  • Series 2-C : 20-year PDST-F rate, at the end of the 10th Year, plus 3%

Buying and Selling Shares

Those intending to purchase SMC’s Series 2 Preferred Shares may contact their broker or the following underwriters: HSBC, Union Bank, BDO Capital, China Bank, RCBC Capital, First Metro Investments Corp., ING Bank, Philippine Commercial Capital Inc., Standard Chartered Bank, SB Capital and United Coconut Planters Bank.

The offering period will last until September 14, 2012.

No later than October 12, 2012, the shares will also start trading on the Philippine Stock Exchange. This gives holders another income potential through capital appreciation and also more liquidity option through easy buying and selling of shares on the exchange.

Related readings:

James Ryan Jonas teaches business management, investments, and entrepreneurship at the University of the Philippines (UP). He is also the Executive Director of UP Provident Fund Inc., managing and investing P3.2 Billion ($56.4 Million) worth of retirement funds on behalf of thousands of UP employees.