One of the Philippines’ biggest conglomerates SM Investments Corporation (SMIC) has finalized plans to merge its real estate businesses, consolidating the assets under SM Prime Holdings, the country’s leading shopping mall owner and operator.

The merged entity will create the most valuable real estate property firm in the country with an estimated market capitalization of at least US$14 billion, exceeding that of Ayala Land, which has an estimated market cap of US$10.9 billion.

The proposed consolidation, announced on May 31, involves a series of steps. The first one consists of exchange offers for the outstanding shares of two listed companies – SM Development Corporation (SMDC), a residential property developer, and Highland Prime, a developer of high-end residential properties within Tagaytay Highlands.

The exchange offers are structured in such a way that SM Land, a privately-held real estate subsidiary of SMIC, will offer existing shares of SM Prime in exchange for the outstanding shares of SMDC and Highland Prime.

Following the completion of the exchange offers, the next step involves the merger of SM Land with SM Prime, with the latter as the surviving entity. The third step involves SM Prime acquiring specific real estate companies and assets currently held by SMIC in exchange for new shares in SM Prime. These assets include the SM Mall of Asia complex, leisure estate Pico de Loro, and SM Hotels and Conventions Corporation.

The consolidation is intended to create an integrated real estate company, which will allow the merged entity to undertake larger scale projects with the participation of all of its business units. Its expanded scope, under a simpler and more transparent corporate structure, is expected by SMIC and SM Prime to create efficiencies and further crystallize the value of the real estate businesses of SMIC.

The merged company will be among the largest integrated property developers in the region with offerings spanning across diverse sectors of mall, office, residential, hotel and leisure development. SMIC and SM Prime believe the transaction will also strengthen the enlarged company’s balance sheet and reduce its debt exposure, which will provide more headroom for funding options to support the new company’s organic and inorganic growth objectives.

“This landmark transaction is mutually beneficial for all the stakeholders,” says SMIC executive vice-president and CFO Jose Sio in a statement. “The broadened organizational capabilities of the new entity will give it the operational and financial muscle to create additional value in our asset base through accelerated and synergistic projects, not just among the property companies but also among the other core businesses of SMIC, which includes retail operations and banking.”

Henry Sy, Jr will serve as chairman of the board of SM Prime, while his younger brother Hans Sy will remain the president. Jeffrey Lim will also continue his existing role as CFO.

The exchange offers for SMDC and Highland Prime by SM Land commences on June 4 and will remain open until July 9. The consolidation is expected to be completed by the end of 2013, subject to regulatory and stockholder approvals.

BDO Securities Corporation is acting as offer agent for the exchange offers. BDO Capital and Investment Corporation, J.P. Morgan and Macquarie Capital (Singapore) are the financial advisers for the reorganization. Manabat Sanagustin & Company, the local member firm of KPMG International in the Philippines, is the independent financial adviser.