Exploiting opportunities

In times when cash is king, it is no wonder that San Miguel Corp., Asia’s biggest listed food, beverage and packaging company, is just about everywhere nowadays.

The company has long been known as distiller of one of the world’s best beers along with as manufacturer of tasty meats and cold cuts. But now, it’s on the verge of transforming itself into a company that will also fuel our cars, light our homes, and provide us Internet connection and banking services.

San Miguel had bought 27 percent of Manila Electric Co. from state-owned Government Insurance Service System, fielding no less than Eduardo “Danding” Cojuangco, his trusted ally Ramon Ang, lawyer Estelito Mendoza and another representative into the Meralco board. Ang is now vice chair and San Miguel’s Ferdinand Constantino also the CFO of the Philippines’ largest power retailer.

Cojuangco, Ang and Mendoza have also come aboard Petron Corp. after securing in December an option to buy control of the nation’s largest oil refiner from a unit of London-based fund manager Ashmore Investment Management Ltd.

The Philippine food giant had likewise partnered with Qatar Telecom to buy into the nearly comatose Liberty Telecom Holdings Inc. and turn it into a wireless and broadband company intended to give bigger rivals a run for their money. Already, the group tapped Smart Communications Inc.’s former marketing whiz Anastacio “Boy” Martirez. And the hiring of key telecom executives, according to the grapevine, won’t stop there.

Don’t expect San Miguel’s acquisitions to stop, given the company’s continuing build up of its war chest backed up by the huge pile of cash it has accumulated that began in 2007.

Divestment-for-acquisition strategy

As of last year, the company had more than P100 billion in cash and near-cash in its books, courtesy of asset sales in late 2007 when it sold a stake in Australia’s National Foods and Dairy Farmers to Kirin Holdings Co., and then Tasmanian brewer J Boag & Son’s to Lion Nathan Ltd., which is also majority-owned by Kirin.

San Miguel this year resumed its divestment-for-acquisition strategy. It’s disposing 43.25 percent of San Miguel Brewery Inc. to partner Kirin Holdings Co., Japan’s biggest brewer, in a transaction valued at P65 billion based on market prices. The parent is also selling domestic beer brands, intellectual property rights and some parcels of land to the brewery for P38.8 billion.

Its president, Ramon Ang, also said the company will sell stakes in its other units, consistent with a diversification strategy announced two years ago. The sale of the stake in the brewery to Kirin and the domestic assets to the brewery will double San Miguel’s cash to more than P210 billion.

Assuming that a 51-percent stake in Petron is worth about P33 billion, the 27 percent in Meralco P27 billion, a 34-percent stake in Bank of Commerce P2 billion and, let’s say investments in Liberty together with Qatar would be worth P10 billion in the first year, that would leave the food giant with a substantial P130 to P140 billion to keep on targeting undervalued companies in fast-growing energy, telecommunications and mining sectors.

It’s noteworthy that San Miguel has until 2011 to settle its bill with GSIS in Meralco and until late 2010 with Ashmore for Petron. Portions of the investments were probably paid but some or perhaps a bigger part of the cash-out had been deferred.

Criticisms and conjectures

Given the buzz that San Miguel had been churning in the last two years, it’s not surprising that criticisms – and conjectures – have flooded in as well.

There’s this bit about how it got away with such generous payment terms with GSIS and Petron or how it got the deals in the first place.

That politics may have come into it as result of San Miguel’s connections to other key players like GSIS president Winston Garcia and Ashmore’s Roberto “Bobby” Ongpin is something that may just be purely coincidental or absolutely valid, depending on which said of the fence one is.

In the case of the Meralco deal, what is more critical to many is whether or not the GSIS members’ interests were marginalized.

Then there’s the more fundamental observation of how the company is perhaps spreading itself thinly, quickly and maybe even irrationally by plunging into businesses which again many feel are beyond its core competence.

The right thing

This brings us then to the more important issue of whether San Miguel, which is practically a Philippine jewel, is doing the right thing.

The company’s food and drinks brands are household names. San Miguel beer, whose brands control 95 percent of the local market, has been brewing for more than 100 years. San Miguel’s core businesses have matured into a level that they can practically run themselves.

And when a business already controls much of the market, the potential for growth is already limited. And so goes the rationale for the expansion and acquisition of relatively cheap but high-growth companies that will give San Miguel the upside it needs to boost value for its shareholders.

San Miguel is just doing what any right-thinking company with a huge cash hoard must do during times of declining and deflated asset prices.

Ayala Corp., the flagship company of one of the country’s wealthiest families, started out merely as a property company. Over the course of its 175-year existence, it had expanded into banking, telecommunications, utilities, retail, electronics and outsourcing.

Now, it’s the tandem of Cojuangco and Ang that has the resources to break out of their comfort zone into new ventures, from drinks and food to utilities, telecommunications and energy.

These are new areas for San Miguel, but areas where growth and enhancement of stockholders’ value can be achieved. And it appears, Cojuangco and Ang will exploit these opportunities knowing well of the attendant risks involved.

Kudos to Manila Golf’s first lady president

Berne Sy, the lady that fought to break the male dominance at the elite Manila Golf Club and eventually became the first lady president of the club, did it again. She played the perfect host of the 39th Golden Tee tournament last week where three cars were won by lucky participants, two for hole-in-one achievements and another through the raffle. Who says a lady president can’t do it? Congrats, Berne, you’re the one who deserves an extended term.  

Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. For a compilation of previous articles, visit www.BizlinksPhilippines.net.