Why the farmer beneficiary’s choice is not easy

So much depends on what economists call “price discovery,” which in the absence of a market is difficult if not impossible.

The HLI case is a puzzle because the landowner thinks of land reform in terms of just compensation, while the tenant-beneficiary thinks of it in terms of land.  The missing element, traditionally, is the price of the land.  Ordinarily, that price is at fair market, but this also makes the reform fiscally expensive, hence the resort to use of “special” funding (such as recovery of ill-gotten Marcos wealth) to allow the government to expropriate, and then to “sell” the land to the tenant at an affordable price.

Now comes the “stock distribution” plan of HLI, whereby, under the latest SC decision (not yet final as of July 9, 2011) is pro hac vice valid with respect to the tenant-beneficiaries identified as qualified as of 1989, when HLI was created.  That stock option still exists, the SC having decided that each beneficiary is entitled to 18,804 shares of HLI (par value P1).  The SC also decided that each beneficiary is also entitled to land, if he does not exercise the option to own stock in HLI, to 6,886 sq. m. of land.

There is nonetheless a certain price of land in terms of stock:  something like 2.7 shares of stock per sq. m. of land.  This price was set in 1989, and now validated, unchanged, by the SC decision.

For practical purposes, what matters is the value of the land or stock in terms of money.  How much is land worth today?  A good guess for agricultural land is of the order of P50 per sq. m.  If that is the case, the 18,804 shares of stock, equivalent to 6,886 sq. m., is worth P344,300.  In other words, a share of stock in HLI is worth P18 today if reckoned in terms of agricultural land.

But how should HLI be valued today?  Presumably, it has a book value known to shareholders and submitted annually to SEC.  It would also reflect the value of HLI’s non-agricultural assets, less its liabilities and debt.  If, for example, the value of such assets (adjusted for liabilities and debt) is of the order of P6 billion, and if HLI has 355.5 million shares outstanding (the same as that structured in 1989), HLI stock would be worth roughly P17 today.

The illustrative calculation above of P17 is as follows.  Take P6 billion (non-agricultural), add P2.5 billion (agricultural), and get P8.5 billion, which is to be divided by 355.5 million shares.  (NB:  The capital structure of HLI, according to the SC decision, consists of 118.4 million shares to which tenant-beneficiaries are entitled; and 237.1 million shares reserved for other shareholders; for a total of 355.5 million shares.)

As is often the case, the value of corporate stock is a difficult exercise in the absence of a ready and liquid market.  HLI is a “private” corporation whose shares are not held by the public and are not traded on a stock exchange.

Nonetheless, if the farmers opt for land, the non-farmer shareholders of HLI stand to gain more if the value of non-agricultural assets of HLI were much more than that of the land.  If the farmer opts for stock, it would be because he believes that his interests would be better served by giving HLI control over management of the land and by his getting a share in the income from the non-agricultural assets of HLI.  For the farmer beneficiary, the choice between land and stock is not easy.

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