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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

BATTLE FOR SAN MIG

A Philippine giant is being targeted by foreign interests. Any buyer of San Miguel must contend with a host of legal and financial obstacles

By Jonathan Sprague and
Raissa Espinosa-Robles / Manila


Go to a San Miguel performance chart

Go to the saga about San Miguel shares

WHEN PETER CHUA DIED five years ago, he left his children with a treasure trove. The retired snack-factory accountant, who arrived in Manila as a penniless refugee from China after World War II, had used his annual bonuses to buy stock in San Miguel Corp. Good bet. Including dividends, shares in the Philippine beer brewer bought in 1986 have grown 12 times in value in the past decade -- a thumping 28% annual return. So blue is this blue chip that the Catholic Church and the country's pension funds have long owned minority stakes. After all, San Miguel generates 4% of the country's GNP and pays 6% of total taxes.

But the froth seems to be going from the nation's favorite brew. San Miguel's core beer business is losing market share to Asia Brewery, owned by tobacco-and-airline tycoon Lucio Tan, while its regional expansion programs guzzle money without giving much in return. "If you really look at performance since 1986, the company hasn't gone anywhere," says the research chief of a major securities firm. "Each year, it sells something to make net income look good." True, the counter continues to outperform the market. Most analysts, however, now have a "sell" recommendation on the stock.

And yet somebody is buying. In mid-November, a block of 50 million shares changed hands for $73 million, 30% more than the market price. ING Baring Securities, which brokered the deal, declines to identify the buyer or seller. The transaction rang bells throughout the market. "Somebody spent 2.5 billion pesos to buy 2% of a company," says the research chief. "In normal times, that's somebody with excess funds, but who has excess funds now? If you did, why buy 2% of a conglomerate that pays dividends of less than one peso per share? Therefore, you're left with somebody with a purpose."

Who is interested in the Philippines' largest corporation? There is no shortage of potential buyers. Anscor Hagedorn Securities, which San Miguel chairman and CEO Andres Soriano III happens to own, ticks off the rumored candidates: Asia Brewery's Tan, Malaysian tycoon Robert Kuok and Indonesia's Salim group. Tan owns the rival beermaker, so Soriano could block him in the courts on conflict-of-interest grounds. Kuok has a strategic partnership with Australia's Coca-Cola Amatil, in which San Miguel has a 25% stake. And Salim? The group wants to turn its Philippine subsidiary, Metro Pacific, into a leading conglomerate.

All three parties declined to comment, but Asiaweek sources confirm that the Salim group is in the thick of the maneuverings. As of Nov. 30, the PCD Nominee Corp., a subsidiary of the Philippine Central Depository Inc., was holding a sizeable 8.5% of San Miguel for an unknown foreign party or parties (see table page 76). PCD did not even appear on the list of San Miguel's top 20 shareholders in October. Many blue chips in Asia have become undervalued because of the region's currency devaluations, Manuel Pangilinan, managing director of Hong Kong-based First Pacific and chairman of Metro Pacific, recently told reporters. He added: "Draw your own conclusions."

Whoever is buying would need to do much more than just offer premium prices for San Miguel shares. A big chunk of the company -- 47.9% -- is under temporary stewardship by the government because the shares were allegedly bought using public funds during the rule of authoritarian president Ferdinand Marcos (see story page 76). Eduardo Cojuangco, a close Marcos friend, says he owns the sequestered shares. Then there is Soriano, whose family has managed San Miguel for more than 50 years. Says a pro-Soriano source on the San Miguel board: "He will fight [to remain at the helm] to the bitter end."

Metro Pacific is a known Gordian-knot slicer. The group's cellular telephone arm in Manila, Smart Communications, recently managed to get its hands on sequestered shares in Eastern Telecommunications Philippines. Marcos associate Roberto Benedicto had reached an amicable settlement with the government, agreeing to give up his claim to 10.2% of Eastern in return for keeping 9.8% of the company. While the deal awaited approval from the courts, Smart negotiated with Benedicto to buy the 9.8% stake. The sale was consummated after the courts okayed the compromise. The government kept the 10.2% of Eastern.

Smart is now talking to other Marcos associates, Manuel Nieto and the heirs of the late Jose Africa. Following Benedicto's lead, they too are negotiating a compromise with Manila. Smart has already signed a memorandum of agreement with the putative owners to buy their combined 40% stake. The money would be held in escrow while the parties await a court decision. The deal would be an "intermediary step" that all parties -- the government, the courts, Nieto and Africa's heirs -- would have to agree to, says a Smart official.

A San Miguel takeover could follow the same pattern. The government may agree to let Cojuangco keep part of the sequestered shares. Metro Pacific -- or Tan or Kuok or any other purchaser -- can then buy Cojuangco's stake. The talk is that Metro Pacific has already given Cojuangco a non-refundable "goodwill" payment. How big a stake may he end up with? Cojuangco may settle for 20.1% of San Miguel, comprising his personal shares and the stocks he bought from a Soriano relative in 1983. The value in the open market: about $400 million. Significantly, First Pacific disposed of its majority share in Hong Kong cellular operator Pacific Link for $310 million last week. Foreigners can own up to 40% of a distribution company like San Miguel.

Can Cojuangco decide to keep his stake and take over San Miguel himself? That's possible -- but the government may make it a condition that he sell the shares. It would be politically unpalatable for a Marcos associate to gain control of San Miguel with presidential elections scheduled in May. A San Miguel board meeting is due to take place in early December, raising expectations that something may happen soon. But all this is just talk -- so far -- with President Fidel Ramos and other officials all denying knowledge of any compromise settlement being negotiated with Cojuangco.

What happens to Soriano? He and his family own just 1% of San Miguel, though the CEO votes the 5.3% stake of the company's pension fund. Soriano is in charge at the state's pleasure. Government nominees fill 11 of the 15 board seats and the CEO's relationship with them has not always been smooth. Earlier this year, San Miguel swapped its 70% stake in Coca-Cola Bottlers Philippines for 25% of Amatil, which has a license to bottle Coke in 17 countries in Asia and Eastern Europe. Some government directors complained that San Miguel should have gotten more shares.

Soriano could still put up a fight. "We will use the Manila Hotel precedent," promises the San Miguel board source. Last year, Malaysia's Renong Berhad won a government auction for control of the inn, but the Supreme Court said the Manila Hotel is a historic landmark that should not go to a foreigner. Soriano could argue that San Miguel and its brands are national institutions. (But that could raise the question of why he is running the company -- Soriano is an American national.) The CEO can also invoke conflict of interest. Metro Pacific owns a packaging firm that competes with a San Miguel subsidiary.

The bottom line for shareholders is how these maneuvers would affect the company. Analysts say clearing up San Miguel's ownership could be a good thing. "Continued sequestration would spell steady deterioration because government has the Midas touch in reverse," says one industry watcher. "Everything it touches turns to dross." The state's heavy hand is blamed in part for the company's sliding beer-market share (from 99% in 1981 to an estimated 70% last year), and poor showing in ice cream and meat products.

Despite its internal problems, San Miguel remains a fundamentally sound company. It has good cash flow, manageable debt, an unparalleled distribution network and brand-name products, says Raffy Manalaysay of SocGen-Crosby Securities in Manila. Oliver Calma of Sun Hung Kai Securities is optimistic in the long-term: he expects Amatil and start-up breweries in China and Vietnam to begin paying big dividends in the next century. San Miguel is already a well-known brand in Hong Kong. All that is needed in the battle for the beer bottle is a compromise that everyone can drink to.


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