Thursday, 5 March 2009

Philippines epic battle: Ayala versus San Miguel

By Tony Lopez

The Ayala Group seems to be readying to do battle with what is now the fastest-growing business group in the Philippines, San Miguel Corp. (SMC).

Having refashioned itself as a holding company, SMC has acquired majority stakes or near control of the two biggest private companies in sales in the country, Petron Corp. and Manila Electric Co. (Meralco).

Petron and Meralco are also among the best-known brands locally and among the most bankable. Together, SMC, Petron and Meralco are a formidable corporate triumvirate with combined assets of more than P560 billion (as of 2007), sales of P541 billion, and equity of P232 billion.

Ranged against these three, Ayala, at first blush, looks puny: Sales in 2007 of P78.7 billion, assets of P196 billion, and equity of P114 billion. But in profits, Ayala’s 2007 net of P19 billion is slightly bigger than the P18.34 billion combined profits of SMC, Petron and Meralco.

The SMC group is entering territories that Ayala had all along thought were its franchises—cellular phone, water, banking and property.

SMC President and Chief Strategist Ramon Ang has announced the group will priced its products and services much lower than the competition’s. In cellular phones, SMC’s QTel will charge only about 20 percent of Globe’s. Ang has also promised to reduce Meralco’s electricity rates by 20 percent and Petron’s prices by also 20 percent.

That has scared the daylights out of Jaime Augusto Zobel de Ayala (JAZA), the chairman and CEO of Ayala Corp. What is perhaps unnerving to JAZA is that San Miguel became so large, at least three times its 2007 size, in so short a time and with so little investment of capital. RSA’s shrewd dealing and maneuvering did the trick.

Ang demolished overnight the once mighty Lopez empire in energy. He quoted a high price for PNOC’s geothermal assets, prompting patriarch Oscar Lopez to quote three times the IPO price, at P58 billion to win PNOC EDC. This bled the Lopez group financially, enabling the San Miguel group to raid the corporate headquarters, Meralco and take control of it, almost for a song.

It is as if Ang had enticed Lopez to a big battle away from headquarters and the latter gamely sent his best troops and best generals to the battlefield miles away from headquarters. It was too late for Oscar to realize that Ang’s final objective was the lightly defended main camp, Meralco, which easily succumbed to San Miguel’s guerilla attack. Oscar has to get white knight, Manny Pangilinan of Philippine Long Distance Telephone Co. (PLDT) and Metro Pacific, to defend what is left of the Lopez holdings in Meralco.

JAZA must have studied the Meralco saga. Thus, he has summoned back to headquarters his top generals—Jaime I. Ayala, 46, the CEO of Ayala Land Inc. and Gerry Ablaza, 55, the CEO of Globe Telecoms. Both Jimmy Ayala and Gerry are strategy and finance whiz kids. Harvard MBA Jim spent 19 years with the consulting company McKinsey while Gerry had a long stint with Citibank. Their skills and market savvy will blend with those of JAZA, 49, and his kid brother, Fernando Zobel de Ayala, 48, both of whom also trained at Harvard. The quad are an awesome team against the duo of US-educated Eduardo “Danding” Cojuangco Jr., 73 and Ramon Ang, 53, who is a mechanical engineer who thinks creatively out of the box, often shunning conventional wisdom to make a deal or an acquisition.

Also, of late the Ayala group has been aggressively raising cash to defend itself against predators, consolidate its businesses and become ready for any opportunities arising from the crisis. Property company Ayala Land, Inc. alone increased its borrowings 65 percent, from P10 billion in end-2007 to P16.75 billion in end-2008.

In an environment that is markedly different from the past and where conventional rules suddenly do not seem to apply (and will perhaps fail), Ang’s model of management seems to be working well.

Just study how he took control of Meralco and Petron with hardly anybody looking, and how he boosted SMC’s cash reserves by selling the company’s assets in Australia at 15 times their cash before the financial meltdown. Ang raised about $2.5 billion from the effort in opportunity profits alone because National Foods Ltd is now worth only six times EBITDA [Editor’s bite: earnings before interest, taxes, depreciation and amortization] and the Australian dollar has devalued by 34 percent.

Ang has likewise been recruiting top talents and experienced hands to manage San Miguel’s recent acquisitions. You have the young Eric Recto at Petron and the experienced Ping de Jesus at Meralco.

Who will win between San Miguel and Ayala? The answer is not clear yet. One thing is certain—both will be here for a long, long time and will have considerable impact on our lives and our lifestyles. Ayala of course is the oldest Philippine conglomerate (it was founded 1834). But San Miguel, though not young (it was founded 1890), is now the largest conglomerate.

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