The deal is the first partnership between San Miguel and its main brewing rival, billionaire Lucio Tan, who owns Asia Brewery and Tanduay Holdings (TDY.PS). Tan is the country's second-richest man, with Forbes estimating his family's net worth at $3.5 billion.

Under the deal with Tan's Trustmark Holdings, San Miguel will take indirect stakes of 40 percent in Philippine Airlines Corp PAL.L and 49 percent in its low-cost partner Air Philippines Corp, also known as Air Phil. San Miguel, valued at $6.4 billion, will gain management control of PAL, the country's biggest airline.

Asked when San Miguel (SMC.PS) will take over the carrier's operations, company president Ramon Ang said in a mobile text message: "After the (Easter) holidays."

Carlos Jalandoni, vice president at BPI Asset Management, which has $15.6 billion of assets under management, said the deal gives San Miguel new distribution channels for its food and drinks business. Previously, Tan didn't allow his rival's drinks on Philippine Airlines' flights.

"Obviously there are synergies: food, airlines, consumer, but a minority stake is unusual," Jalandoni said. "Now the question will be: is this an initial step to something bigger?"

EXPANSION

San Miguel has spent at least $3 billion since 2007 when it embarked on an aggressive plan to diversify from its food and drinks businesses into almost every capital intensive sector - from power and telecoms to mining, banking and infrastructure.

The expansion, aimed at accelerating profit growth, has failed to stir fund managers, with institutions holding less than 2 percent of the company.

"It certainly has very good assets ... And I know there are people who like these assets," said Jalandoni. "I think people are cautious about San Miguel because they don't really understand the company as it's gone through so many changes so quickly."

San Miguel is majority-owned by Top Frontier Investments Holdings led by businessman Roberto Ongpin, a former cabinet official under Ferdinand Marcos. Other significant shareholders include chairman Eduardo Cojuangco, who because of illness has handed the reins to Ramon Ang, a close associate.

Net income fell 13 percent last year to 17.5 billion pesos, sliding 24 percent in October-December mainly due to weakness at its liquor unit. Its flagship arm, San Miguel Brewery (SMB.PS), is part-owned by Japan's Kirin Holdings (2503.T).

TAKING WING

San Miguel's investment will be used to help upgrade PAL's fleet and expand operations to better compete with budget operators such as Cebu Air Inc (CEB.PS).

PAL has been hit by rising fuel costs and labour problems, and lost $33.5 million in October-December. Cebu Air posted net income last year of $84.3 million, though that was down by almost a half from 2010.

San Miguel's entry into the airline business is likely to have been triggered by the growth potential of the Philippines' tourism industry. The government is targeting 10 million visitor arrivals by 2016, up from nearly 4 million last year.

"They're banking on tourism ... on making the airline more efficient the same way Cebu has done," said Fitz Aclan, senior assistant vice president at BDO Trust in Manila.

It wasn't immediately clear how San Miguel will fund its airline ticket. The group has sought a loan equivalent to $800 million to complete the $577 million acquisition of a majority stake in Esso Malaysia Bhd and of both ExxonMobil Malaysia Sdn Bhd and ExxonMobil Borneo Sdn Bhd.

Shares of PAL's majority stakeholder PAL Holdings (PAL.PS), 97 percent-owned by Trustmark, which hit a life high on Tuesday, slid as much as 2.4 percent on Wednesday before closing down 0.12 percent.

San Miguel rose 0.8 percent, its biggest 1-day gain in five weeks, while the broad market .PSI slipped 0.4 percent.

(Editing by Ian Geoghegan)

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