Thursday, 9 April 2009

Philippine food giant San Miguel Snaps Up Deals in Slump

http://online.wsj.com/article/SB123923544731203315.html?mod=googlenews_wsj

Lifted by buoyant consumer spending and the belief that some economies are bottoming out, 119-year-old Philippine brewer San Miguel Corp. is using the global downturn to grab stakes in regional energy and natural resources markets.

The Philippines' largest food-and-beverage company with annual sales of about $3.52 billion sees the current downturn as an opportunity similar to the one presented by the Asian financial crisis of a decade ago. Then, businessmen Ramon Ang and Eduardo Cojuangco Jr. took over the Manila company as its business struggled. They streamlined its operations and expanded distribution networks, almost doubling its net profit within a year.

Today, the two men are using San Miguel's strong balance sheet to acquire major stakes in the country's biggest oil refiner and electricity distributor, and bid on other businesses such as communications companies that are likely to thrive when the global economy recovers.

"San Miguel is cash-rich and ambitious," said Jojo Gonzales, managing director of Manila brokerage Philippine Equity Partners Inc.

On Wednesday, San Miguel's brewing unit, San Miguel Brewery Inc., reported first-quarter net profit rose 8% to $54 million, underscoring its cost controls.

The Philippine company isn't alone in its ambitions. Chinese concerns are bidding for stakes in iron-ore and aluminum mining firms. They spent more money buying stakes in overseas companies in January than U.S., British and Japanese companies combined, according to Thomson Reuters.

In Malaysia, utilities conglomerate YTL Corp. used a cash-spinning water supply business in Britain to help fund the purchase of a Singapore-based power generator. Budget airline AirAsia Bhd. is aggressively spending on new jets and has started a new cut-rate long-haul service called AirAsia X.

All this activity doesn't quite add up to the new engine of growth that the World Bank said will be required to pull the world economy out of its nose dive. But it points to a growing conviction among Asian companies that now is the time to take advantage of weakened targets.

Some analysts and credit-ratings firms have reservations about San Miguel's decision to expand out of the Philippines' beer market, where it has a 95% market share. "In our opinion, San Miguel is expanding into sectors that are exposed to a more uncertain operating and regulatory domestic environment," and might not be as profitable as the company predicts, said Standard & Poor's credit analyst Allan Redimerio.

Mr. Ang said he is unperturbed. "This isn't an accidental phenomenon. We've been planning this for a long time," he said.

While the well-connected Mr. Cojuangco sets the long-term direction of San Miguel, Mr. Ang -- 20 years younger than the man he calls "The Boss" -- often calls the plays and cuts the deals.

Mr. Ang, San Miguel's president and chief operating officer, and Mr. Cojuangco, the company's chairman and CEO, hatched their plan to remake San Miguel when Mr. Cojuangco regained control of the company in 1998. At the time, the company was losing money in its overseas operations. Mr. Ang estimates previous management lost around $1 billion expanding into China, Vietnam and elsewhere.

"We couldn't compete with local brewers, especially the Chinese," Mr. Ang said. "We saw there was a problem and we asked ourselves what we could do."

The answer was to move into businesses where they could take the cost-cutting techniques they honed in beer and apply them to industrial businesses that promised higher returns. The problem was finding a way to raise the cash to effect the change.

Enter the subprime crisis. Minutes from San Miguel board meetings show that as early as 2006 Mr. Ang was worrying about the impact of toxic mortgages on the global economy. "The rest of the board said, 'Come on, Ramon, don't be crazy,'" Mr. Ang recalls, but his colleagues gave him permission to sell many of San Miguel's prized assets.

Throughout 2007, Mr. Ang sold the company's interests in several overseas business, including Australian dairy giant National Foods Ltd. That deal, struck at the peak of the market and with the Australian dollar nearly at parity with the U.S. dollar, brought San Miguel $2.6 billion in cash. Japan's Kirin Holdings Co. Ltd., which bought all of National Foods, recently agreed to buy 43% of San Miguel's brewing business for $1.24 billion.

When the global crunch set in for real last year, Mr. Ang started buying. In October, San Miguel bought a 27% stake in one of the country's most important companies, electricity distributor Manila Electric Co., for about $615 million.

San Miguel joined forces with Qatar Telecom QSC in December to invest as much as $1 billion to set up a new Philippine cellular phone network. It spent $10 million in December for an option to acquire a 50.1% stake in Petron Corp., the Philippines' biggest oil refiner and distributor. The option gives San Miguel the right to buy the stake for 32.2 billion pesos, or $667 million, by the end of 2010.

"No guts, no glory -- that's what we say," said the animated 53-year-old Mr. Ang, who paces and waves his arms frequently in an interview at San Miguel's headquarters. "We're building a completely new company, and it's starting right now."

Messrs. Ang and Cojuangco have worked closely together for years. They met through a shared passion for fast cars. Mr. Ang looked after his boss's business interests when Mr. Cojuangco fled the Philippines in 1986 with the ouster of his close ally, former dictator President Ferdinand Marcos.

Mr. Cojuangco later returned to the Philippines, running unsuccessfully for president in 1992. Six years later, with Mr. Ang, he regained management control of San Miguel, which he had run briefly during the Marcos years. Since then, Mr. Cojuangco has built political alliances that some analysts say have given him the confidence to steer San Miguel into sensitive industries.

Write to James Hookway at james.hookway@awsj.com

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