UPDATE 1-JG Summit to pay $1.65 bln for San Miguel's stake in Manila Electric

Tue Oct 1, 2013 5:42am EDT

(Adds analyst comments, share prices)

* JG Summit buys into Meralco at discount of around 20 pct

* JG Summit open to further acquisitions in power

* Shares of Meralco, JG Summit, San Miguel gain

MANILA, Oct 1 (Reuters) - Philippine conglomerate JG Summit Holdings Inc will pay 72 billion pesos ($1.65 billion) for San Miguel Corp's stake in Manila Electric Co (Meralco) in what would be the country's biggest M&A deal in nearly two years.

The acquisition is yet another sign of Philippine conglomerates diversifying away from their traditional businesses in recent years. JG Summit, founded by billionaire John Gokongwei more than 50 years ago, is entering electricity distribution to benefit from an expected rise in power demand as the Philippine economy expands.

JG Summit, whose businesses include food, airlines, petrochemicals, property and banking, said in a statement that it will acquire a 27.1 percent stake in the Philippines' largest power utility via a debt and equity deal. The stake is equivalent to around 305 million shares valued at about 236 pesos apiece, based on Reuters calculations.

The deal marks a discount of around 20 percent to current market prices, and is also 13 percent cheaper than the July share sale in which San Miguel sold a 5.7 percent stake in Meralco to investors that included the Metro Pacific group .

The M&A deal is the biggest involving a Philippine firm since October 2011 when JG Summit sold its telecoms arm Digital Telecommunications in a $2 billion share-swap deal with Philippine Long Distance Telephone Co.

JG Summit and San Miguel did not explain the steep discount for the Meralco stake. But the discount does not necessarily mean Meralco is overvalued, analysts said.

"That's a big block, and of course you get a discount if you buy wholesale," said Joseph Roxas, president of Eagle Equities Inc in Manila.

"For San Miguel, they can do a lot with the money. They can fund their road projects or put more money in PAL," he said.

San Miguel won earlier this year a state contract to build a $380 million airport expressway project.

Since last year, San Miguel also owns Philippine Airlines (PAL), competing directly with JG Summit's Cebu Air Inc .

SHARES JUMP

Meralco closed 3.2 percent higher on Tuesday in a broader market that was largely flat. The stock has risen more than 7 percent in just two days after San Miguel and JG Summit disclosed the transaction.

JG Summit climbed 3 percent, erasing losses of 1.8 percent on Monday. San Miguel was up 0.8 percent.

Lance Gokongwei, president of JG Summit and the only son of John Gokongwei, said he sees bright prospects for Meralco's power distribution and generation businesses. Earlier this year, the group had expressed its intention to invest in power assets.

"The power business will grow in line with the Philippine economy, and with the leadership team at Meralco, we're in safe hands," he said in an interview with ANC News Channel.

The deal also solidifies the partnership of JG Summit and the PLDT/Metro Pacific group. Metro Pacific, sister company of PLDT, is the single largest shareholder in Meralco, holding a stake of nearly 50 percent.

($1 = 43.5 pesos) (Reporting by Erik dela Cruz and Rosemarie Francisco; Editing by Miral Fahmy and Ryan Woo)

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