Friday, 6 March 2009

Philippines' Ayala Corp. looking for opportunities

NORMAN P. AQUINO, Associate Editor
BusinessWorld Online

AYALA CORP. is on the lookout for opportunities — including expanding into new areas of business — but is doing so with caution amid a challenging economic and financial environment, the top officials of the country’s oldest conglomerate said.

The group’s ample liquidity puts it in a strong position to venture into new enterprises, they said, similar to what other big conglomerates are doing now amid plunging asset prices.

"This is a very unique time for Ayala Corp. It has the strongest balance sheet that it’s ever had. But we’re looking carefully," Ayala Corp. President and Chief Operating Officer Fernando Zobel de Ayala told journalists on Wednesday.

"We’re starting to move from making sure that everything is very strong and solid, to one [where] we’re on the lookout for interesting opportunities ... Over the next year or so, hopefully we’ll see interesting things happen."

Ayala Chairman and Chief Executive Officer Jaime Augusto Zobel de Ayala, Fernando’s older brother, said the group was "very careful" with any moves it makes, even as he pointed out that the entry of new players does change how companies compete and the way that industry shapes up.

"One has to be very attuned to it. But we’re very careful with any move we make. Sometimes, opportunities do open up, but there’s got to be a very strong rationale for that opportunity to open up and make sense for us to [grab it]," he added.

Other local conglomerates have started venturing into previously unknown investment territories to remain profitable. Cojuangco-led San Miguel Corp., since announcing a plan to diversify two years ago, now has a substantial stake in the energy sector and is in talks to buy into the oil, water and telecommunication industries.

Another big conglomerate, the Pangilinan-led Metro Pacific group, has entered the toll and hospital businesses, is negotiating to modernize the country’s oldest and busiest port, and is rumored to be wriggling its way into the power distribution business.

Ayala is no stranger to diversification, having transformed itself from a company that focused on agriculture, manufacturing, trading and mining, into a conglomerate with leading positions in real estate, banking, telecommunications, water utility, automobile dealership, information technology and business process outsourcing.

Fernando did not rule out Ayala making an "interesting move" during the so-called down cycle.

"These are the moments [when] the pricing levels are more attractive as opposed to chasing things when they’re really at their peaks. And so we are ready, but it would have something to be very important and strategic for us to pursue."

He noted that looking for opportunities would be the usual second step after the group strengthened its units.

"The first order of the day was to make sure, as we saw this crisis coming, [that we] strengthened further the balance sheets of all the [Ayala] companies," he pointed out.

"The global situation is very serious and so the primary responsibility is, first and foremost, to keep the business strong during the crisis, but to be on the lookout," he added.

But one thing for sure the Ayala group will not do is diversifying for diversification’s own sake, Jaime Augusto said. "Action for action’s sake [is] not always the answer to profitability. Sometimes it’s needed, sometimes you’re going to diversify to adjust to what you perceive will be a changing industry structure," he said.

"[But] that action for action’s sake doesn’t necessarily [lead to] excellent results."

The company earlier said it might invest in power generation, but preferred plants that use clean energy.

"We’re constantly looking at that ... The environmental issue is important throughout the group and you’ll hear it more and more as you move forward," Fernando said.

He added that while the country cannot entirely do away with coal-fired power plants, it is going to start becoming much more aware of environmental issues. "We’d definitely like to be in the sectors that do consider that."

Fernando noted that whether or not Ayala decides to diversify, it will continue to spend on projects within its existing businesses.

"When you look at the capital expenditure of our group and what we’re still willing to put out in terms of expansion, it’s enormous. So any new venture would be in addition to that," he said.

Analyst Jose Mari B. Lacson of Campos, Lanuza & Co. noted that if Ayala was indeed diversifying, it would be to explore new areas of growth and not because its existing businesses had stopped making money.

"In a sense, they are being proactive," he said in a telephone interview, noting that at the moment, the market of many Ayala subsidiaries have yet to hit saturation points.

Mr. Lacson said cash cows Ayala Land, Globe Telecom, Inc. and Manila Water all have a young market. Contrast these with San Miguel, whose main brewery business has only grown as fast as the local economy, which is not that much, he pointed out.

"For Ayala Corp., the motivation is different — it is for growth. If they don’t invest today in companies that generate returns higher than the capital, then they will fall into that state where San Miguel is now," he added.

Eagle Equities, Inc. President Joseph Y. Roxas noted that even if Ayala opted not to diversify, it can always expand its water business here and even abroad.

"Sometimes, if you get big enough in a certain industry, there is no more room to grow. In a saturated market, there’s no other way to go but across ... Sometimes, though, it’s okay to expand in your area," he pointed out.

Mr. Roxas said Ayala Corp. was a conservative group that bids not to win "but to make sure that they make money at the price they bid in."

Appreciating long-held investments in 2007 and successful fund-raising initiatives last year had allowed the group to raise its cash level to about P25 billion as of end-2008.

Ayala Corp.’s unaudited consolidated net income slid by half to P8.1 billion last year due to declining consumer demand and falling capital gains from the sale of stocks amid the slowing global economy.

Profits of listed units Ayala Land, Manila Water, Bank of the Philippine Islands (BPI) and Globe Telecom, Inc. all went up, but growth for the latter two was slower.

Ayala Land posted record earnings of P4.8 billion, a tenth higher than a year earlier, while net profits of Manila Water went up by 16% to P2.8 billion.

Meanwhile, BPI’s net income fell by more than a third to P6.4 billion due to declining securities trading earnings and nonrecurring investment income of its insurance subsidiaries.

Globe’s net earnings also went down by 15% to P11.3 billion last year due to sliding consumer demand.

Ayala Corp.’s equity earnings from companies under its AC Capital division likewise declined, weighed by nonrecurring losses from electronics unit Integrated Microelectronics, Inc., AG Holdings and business process outsourcing firms under LiveIt.

This offset the positive earnings contribution of the group’s water and automotive dealership businesses.

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