RFM refocuses on core refreshment business

Q: After liquidating its interest in Consumer Savings Bank and, very recently, PSi Technologies, RFM Corp. has announced it is shifting back its gear to its core business of refreshment. What prompted this move?

A: With the drop in the value of the peso, change has become inevitable in our country where the population is composed mainly of the poor who are very sensitive to inflation. We have studied various food and beverage models which do quite well in times of recession and identified the refreshment business as a good model. This is because we are participating in industries that have a high barrier to entry, like softdrinks and ice cream, which are very capital intensive and require a lot of investment in brand marketing. The Philippines is also a hot country and refreshment business do well under such climate.

We have also recognized the need for the food industry to consolidate by encouraging mergers and acquisitions. In our case, we earlier revealed that RFM is exploring options to take in investors or strategic partners in our other food businesses, such as flour, chicken and meat, so as to achieve operating synergies and cost efficiencies and face increased competition. This will allow us to focus and excel in the refreshment business. The key learning in the Asian crisis is focus, focus on core competence, and we acknowledge that. So it is not just the non-core businesses that we have opened up but our food businesses as well. We sold Consumer Bank at a good price and also got a fair price for PSi Technologies, which we took public in Nasdaq. We have done quite well in these investments.

How long do you think will it take to achieve your goal of becoming a more focused refreshment company?

I would say about one to two years, as we go through the process with potential partners and investors. We also have plans of merging RFM and Cosmos Bottling Corp. into one listed company, which will take about 12 months. This move will provide better focus for investors. Let’s face it, a multi-listing concept in the Philippines under the present situation will not work anymore. There is no point having RFM and Cosmos listed as separate companies. By having only one listed vehicle, we are also able to increase our investor base.

How do you intend to merge the two companies?

We have hired ING Barings to be our financial advisor in this transaction. Various options are being studied, such as the possibility of allowing RFM shareholders to swap their shares for Cosmos shares. This was the model that we adopted when we made Selecta and Swift semi private. But what we would like to stress is that it is our intention to have one listed and actively traded stock that will focus on the refreshment sector, which we feel has a great story going forward. A more focused company that is easily understood by investors will be rewarded when the market turns around.

What are your thoughts on Philippine business? How do you think companies should position themselves now?

Similar to what we are doing, it is important that we allocate our resources properly to business models that will survive a recessionary environment. All major conglomerates will have to do this, since the Philippine situation is not improving with all these problems from politics to peace and order. I believe consolidation will happen among the current players in the industry today. Strategic investors who have a medium to long-term view on the Philippines will be the ones our country will attract.

There are rumors that you are talking to Pepsi to buy them out and that Coke intends to buy Cosmos?

It is not a secret that we have been looking at Pepsi for the last 10 years and discussions have been on and off. Whatever venture will be reached, we shall see to it that it will be beneficial to the business, and that is not an easy thing to do.

On the Coke issue, we wish to clarify that Cosmos is not on the block. It is true however that many financial and strategic investors have, over the years, been expressing their investment interest in Cosmos because of its outstanding growth and profitability performance in the industry. These are all unsolicited. As you see, we are pushing for our vision in the refreshment sector and our softdrinks business will play a big role in our portfolio. It is very difficult to find a business whose model is recession-proof. Cosmos has been growing at a level of about 25 percent for the last five years now, in fact this year’s income is expected to be close to P1.2 billion. It will therefore be very difficult for us to turn away from this vision.

With the recent acquisition of Purefoods and Coke by San Miguel Corp., do you feel threatened?

I look at the acquisition of Purefoods by San Miguel as beneficial to the food industry since SMC is, at this point, the only one capable of consolidating the food industry. So, from so many players, the number is reduced and it ends cutthroat pricing which does not benefit anybody. For example, with SMC’s acquisition of Purefoods, the chicken industry is down to three players including RFM, and this makes the industry viable.

On SMC’s venture with Coke, I believe they will do better although I feel that Cosmos has gone far down the road and has been able to build a brand image for Pop Cola as the choice of the Pinoys. We have prepared for this scenario and the Coke and SMC deal was just a matter of time. We have been investing on the Pop Cola brand for over five years now and our efforts have paid off. We can see this in the strong growth momentum of Cosmos. I believe we have the resources to dominate this sector in time, and that is why our sights are focused here now.

Going to the macro environment, what do you think must the government do to improve the Philippine business climate?

First, I feel there is a limit to interest rate reduction. Even with the lowering of interest rates, many companies are not enjoying this because the risk in lending has gone up and the spreads continue to be on the high side. Many companies are hurt today. In fact, the situation should be a concern because the peso continues to weaken. It has eroded margins of many corporations who are now reporting losses and cannot pay taxes since there is no income to speak of. In effect, the government will continue to experience budget deficits which will only worsen because the government borrows in dollars.

We have to adopt measures that are different. First, I would follow what Malaysia has done. Peg the peso to a level that will still encourage exports while also allowing businesses some time to make better plans and achieve better margins. The peso should be pegged for maybe two to three years at P46 to P48 level. Interest rates should also be allowed to move to a 10 percent-12 percent level for prime clients. So, while the US rates hover at around 3.5 percent to 4 percent, Filipinos will be encouraged to stay in pesos. At this interest rate level, non-prime clients will also be borrowing at 14 percent-15 percent. Provided the peso hovers within this rate, corporations will have better margins and people can plan better.

Afterwards, we should accelerate the privatization of all possible assets that would encourage strategic foreign investors to come in. Government must even look at privatizing the postal service and some government bureaucracy which can raise cash. By privatizing such agencies, people will also be getting better services. Government must sell assets to raise cash and reduce loan levels. Otherwise, it will keep funding a budget deficit which, in the end, will just get worse. It would be like funding a losing corporation.

There is also a need to encourage banks to lend. Even with lowering of interest rates, banks are more careful in lending since a lot of companies are not doing well. There must be a way to encourage banks to lend again and one strategy could be to allow banks to borrow at subsidized rates from Bangko Sentral. That is, if they put this NPA on a collateral pool, and provided they lend money to non-prime clients at subsidized rates.

On national security, unless we really show stability and maturity, our position in the eyes of the international community will not change and it will be difficult for us to attract investors, be it in equity or debt instrument. This area is more difficult since a lot of people are involved into seeing this goal successfully done.