• Parents vs subsidiaries



    SM Investment Corp. (SMIC) listed in a general information sheet (GIS) as of end-2017 at least 29 companies that it either owns, controls or are only its affiliates. Unfortunately for the public, they would not know if, as the listed flagship of businessman Henry Sy Sr. and his family, SMIC owns 100 percent of just a few or maybe all of those firms.

    Such is the reality in owning companies that have shares listed on the Philippine Stock Exchange (PSE). Listing makes shares, which are mostly common, publicly traded. Yet no one among the public will ever know which among the unlisted subsidiaries contributes more to the parents’ consolidated financial filings.

    Due Diligencer used SMIC as an example of a parent company that has so many other companies under it. Others, like San Miguel Corp., JG Summit Holdings, Inc., Aboitiz Equity Ventures, Inc. and other listed companies, have their own units. Which among them are the parents’ big money earners?

    If such subsidiaries are also listed, won’t it be more profitable for public investors to directly trade the subsidiaries’ listed stocks?

    Not necessarily. By doing so, a public investor would lose the opportunity of indirectly owning the stocks of a parent’s non-listed units.

    Disclosing via POR
    If a parent owns a subsidiary, this would mean control of at least 50 plus one percent of outstanding capital stock. If it is listed, it should say so in its public ownership report (POR), which it does not do because unluckily the POR limits the information to common shares.

    Again, if the parent or mother company owns 50 plus one percent of a subsidiary, the public should be fully informed of the identities of the owners of the remaining 49 percent.

    Incidentally, Ben Hur Ong, a regular reader of The Manila Times, wrote in an email if Due Diligencer was referring to San Miguel Purefoods Co., Inc. when he read about SMC in a previous piece. In reply, I told him I would be tackling the subject in another piece that would not be limited to Purefoods.

    This piece is about the parent and the companies it owns. The poser here, as Due Diligencer has long been asking, is if a company that could also be listed is a subsidiary, why should it resort to issuing preferred shares?

    By the way, more often than not, voting preferred shares are issued to the owners while the public has to content itself with investing in no-voting preferred shares.

    Was it also Ong who wrote Due Diligencer in an email that it is only in the Philippines where preferred shares are classified into either voting or non-voting stock?

    To add to his observation, it is only the PSE that allows the pricing of voting preferred shares much lower than non-voting preferred shares. Is it because voting preferred shares are for owners only?

    In fairness to business owners, while they enjoy owning voting preferred shares, they nevertheless are generous to the public by paying them much bigger dividends for their non-voting preferred shareholdings.

    Distributable dividends
    In consolidated financial filings, a listed parent company usually reports in footnotes that only “so much” is available for distribution as dividends. “So much” refers to an amount that could be much smaller than the reported amount of retained earnings that is usually divided into appropriated and unappropriated.

    “Uappropriated retained earnings,” SMIC explained in the footnote to an annual financial filing, “include the accumulated equity in net earnings of subsidiaries, associates and joint ventures,” which it said amounted to P175.046 billion as of Sept. 30, 2017 and P154.731 billion as of Dec. 31, 2016.

    These amounts, according to SMIC, are not “available for distribution until such time that the parent company receives the dividends from the respective subsidiaries, associates and joint ventures.”

    The public stockholders of SM Investments may not be aware of said footnotes and simply rely on the ability of a listed company to pay dividends based on what are reported in annual financials, which happen to be consolidated.

    Due Diligencer’s take
    The public may wonder how a listed company so easily reverts the appropriated portion of its retained earnings to unappropriated. Is this due to “sudden change of mind” of the members of the board?

    This could lead to speculation that a listed company would prefer to keep its cash intact. Instead of cash dividend, it would decide to distribute stock dividend.

    This, however, is a remote possibility. Reversion to retained earnings of what has already been appropriated could lead to dangerous speculation. Driving up a stock price anchored only on speculation is risky when guessing becomes the name of the market game.

    Isn’t it the board that approves the payment or distribution of dividends? If this is so, how come the directors of the parent would not know anything about the non-listed subsidiaries where they could also be members of the board?

    If the same board acts as directors of these units, it certainly would be knowledgeable about the subsidiaries’ declaration of dividends. Why then should the parent wait for the remittance of dividends by its subsidiaries, associates or joint ventures when they, as insiders, should know anything that’s going on inside the boardroom? Just asking.



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