The price is right

From his eighth floor corner office, RFM Corp. president and chief executive officer Jose Concepcion III can see a huge billboard of Pop Cola, the lead brand of subsidiary, Cosmos Bottling Corp.

These days, Concepcion looks out his window, not without pain.

A few months into his appointment as RFM head in 1987, then 28-year-old Concepcion pushed for and clinched the purchase of Cosmos from the Wong family for P500 million. In the next 13 years, he pumped in another P1 billion to P1.5 billion into the soft drink business.

Last year, Cosmos generated sales of P7 billion, accounting for 35% of RFM’s consolidated revenues. It also outpaced Pepsi-Cola with a 21% market share that was second only to Coca-Cola.

This week, Concepcion will sign a memorandum of understanding with San Miguel Corp. chairman and chief executive officer Eduardo Cojuangco, Jr. for the purchase of RFM’s 83.2% stake in Cosmos. Under the MOU, SMC will pay RFM slightly more than the P14.5 billion it offered and slightly less than the P16 billion RFM wanted.

Not included in the MOU but closed with a handshake is the agreement that SMC will keep all 2,000 employees of Cosmos in its 14 plants nationwide.

Right time and price

"I would have preferred a joint venture with PepsiCo but the SMC offer was superior. At the end of the day, I had to think as a CEO and consider what was best for my shareholders, which included those who bought their shares through the stock market, and not what was best for me," said Concepcion after both boards of RFM and SMC approved the buy out last Thursday.

"SMC’s offer–more than twice what Cosmos is worth– comes once in a lifetime. Although I was very much involved in creating value for Cosmos, I had to let go when the price was right."

Talks with Pepsi-Cola Products Phils Inc. started six months ago. With ABN-Amro as financial adviser, RFM was working towards a three-way partnership with PepsiCo (USA) and its local partner, the Guoco Group.

On the positive side, RFM would have controlling stake of the joint venture, with a 60% stake. PepsiCo also did not insist on an exclusive concentrate purchase contract. On the negative side, RFM would not have an easy exit provision should it want out. "If we sold out, we would have given up everything–even the brand names," said Concepcion.

SMC came into the picture about two months ago, after it repurchased the 65% stake of Australia-based Coca-Cola Amatil in Coca-Cola Bottlers Phils. Inc. The balance 35% of CCBPI is owned by The Coca-Cola Co. (USA).

In meetings with his core management team, which include newly appointed CCBPI president Genaro Lapez, Jr., Cojuangco has enumerated the many reasons why he wanted to buy Cosmos. Foremost among the reasons is the dominance of Cosmos in the low-end soft drinks market, one which has remained untapped by CCBPI in part because of the strong high-end brand image of Coke and in part because of CCBPI’s high cost structure. Unless the strategy has changed, The Coca-Cola Co. will now add the Cosmos brands of Pop Cola, Sarsi, Jazz and RC Cola to its current line-up of Coke, Sprite, Royal Tru-Orange and Lift.

"SMC’s offer came at the right time and with the right price tag," said Concepcion. "On the macroeconomic level, the economy remains weak. On the microeconomic level, we knew we couldn’t sustain much longer the 28% annual growth of Cosmos over the last seven years. The secret to our success has been keeping our costs down. Seventy percent of our sales is done through general distributors."

An overkill

For Concepcion, selling Cosmos to help repay RFM’s $65-million short-term debt problem would have been an overkill. "We’ve already paid back 67% of our bond obligations. We have only $18 million to raise and we could easily get that by selling our flour milling business and have cash to spare for future acquisitions. We haven’t done that because there’s no long any need," he said.

With the sale of Cosmos, Concepcion believes RFM will become a stronger, debt-free company. It will also be a smaller company with consolidated revenues of about P11 billion, down from last year’s P18 billion where Cosmos contributed P7 billion.

"We’re looking at our branded food group like Swift, Selecta and Sunkist for future revenues even as we consolidate our commodity businesses like flour and chicken," Concepcion said

Outside Concepcion’s window, that PopCola billboard will be coming down soon. In its place would be another RFM brand. "We’re still in the business of creating value for our many publics–among others, our consumers and our stockholders," he said. Since taking over the business starting by his grandfather in 1957, Concepcion has demonstrated over and over again that he makes good on his promises.