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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?

AsiaweekTimeAsia NowAsiaweek

MARCH 17, 2000 VOL. 26 NO. 10

Giant On The Prowl
So what do you do with $1 billion - cash? That's the question for Philippine beermaker San Miguel
By AJAY SINGH and ANTONIO LOPEZ Manila

When a large, cash-rich brewer sees regional beer consumption down for the sixth consecutive year, there are two things it can do to grow. It can buy other breweries, or branch out into new businesses. San Miguel Corp., the Philippine beer and food giant, is doing both. Early this month, SMC bought Sugarland, which has four-fifths of the domestic market for ready-to-drink orange juice.

At the same time, San Mig may acquire the China breweries of Australia's Foster's, Asiaweek has learned from investment banking sources. Details are sketchy, but the proposed buy-out is said to be big enough to deplete SMC's cash hoard of $1 billion. Vice chairman Ramon Ang denies any plans to buy Foster's plants. "We are looking at another company," he allows, "a multinational in the United States which is in canned food." The unnamed target's annual revenues: $6 billion. Among enterprises of that size are Kellogg, General Mills and Ralston Purina. If all goes well, says Ang, the acquisition would cost $1 billion.

 
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SMC could be eyeing another pile of money. The Coconut Industry Investment Fund (CIIF) is a state-mandated private trust dating back to the 1980s strongman rule of Ferdinand Marcos. He imposed a levy on copra, which went to the CIIF, controlled by his crony Eduardo "Danding" Cojuangco - now San Miguel chairman. After People Power drove both Marcos and Cojuangco into exile in 1986 (they took the same plane out of the country), the government of Corazon Aquino - Danding's first cousin - sequestered CIIF assets on behalf of millions of farmers. Among the gems in the $2.4-billion CIIF's treasure chest is a 27% stake in San Miguel. Also frozen is another 20% holding owned by Cojuangco, on suspicion that he used coco-levy funds to buy it.

Recently, President Joseph Estrada, whom Cojuangco supported in the 1992 and 1998 elections, agreed to withdraw the claim on Cojuangco's 20% stake, as long as the government can sell the CIIF's 27%. Estrada told the tycoon that the state intends to sell the CIIF shares - valued at about $780 million - to a single buyer or a group. The president wants to put the proceeds into a state-managed trust headed by him, to generate funds for coconut industry development.

Under Danding
San Miguel Corp.'s 1999 Results
billion pesos and annual % change


Sales 75.6 (-3.3%)
Beer 28.3 (+4%)
Liquor 10.5 (+8%)
Food 15.7 (+3%)
Packaging 12.5 (+1%)
Operating income 6.7 (+63%)
Net profit 6.0 (+82%)

s of last week, he had yet to sign a compromise deal for the creation of the new fund. A coalition of major farmers' groups trying to recover the levy funds oppose the agreement, because it would give one-fifth of the new fund's earnings to a Cojuangco-led federation. But a deal is likely to be struck and the stock sold eventually, settling once and for all claims on both CIIF and Cojuangco-held stock.

If a major food and beverage company were to purchase the shares, it could develop synergies with SMC. Estrada, who hopes for a sale within two months, was recently in Hong Kong, pitching to potential buyers. He came up empty-handed. "The equity market has no appetite for such a large secondary placing," explains investment firm Jardine Fleming in a recent report. "It would be difficult politically in the current environment for any compromise deal of such size."

With no apparent takers for the CIIF stake, Jardine has suggested that San Miguel buy it. That would boost Cojuangco's control over the company. As chairman he would be able to vote the 27% holding, along with another 8% bought by San Mig last year. Add to that some 17% held by pension funds over which the tycoon wields influence. Along with his own 20% holding, Cojuangco can wield a hefty 72% of the voting shares.

For the market, however, using four-fifths of a $1-billion cash hoard just to buy one's own stock may suggest a gross lack of business imagination and drive. As it is, San Miguel has been criticized for missing a golden opportunity to expand in the aftermath of the Asian Economic Crisis. In January, Jardine Fleming downgraded San Miguel stock to a hold recommendation, urging investors to defer buying its shares, "due to disappointment over the lack of acquisition potentials and the long-term difficulties faced by [San Miguel's] core businesses."

With 87% of the local beer market, San Mig seems to have little potential for growth unless it can tap new markets and businesses. It has been able to increase profits in recent years mainly through severe cost-cutting, which has resulted in savings worth nearly $10 million annually. It recalled more than 30 managers from Hong kong, and retired 100 executives. SMC also consolidated all its offices in Metro-Manila into its headquarters in suburban Pasig City.

Last year, despite a 3% drop in peso sales to $1.8 billion, net income jumped 63% in peso terms to $164 million. With the Crisis over, SMC is now projecting huge sales increases. Its salesmen are under orders to hike revenues by 40% by 2002 - or get fired.

Why didn't San Miguel go shopping around Asia during or after the Crisis? For one thing, it felt the returns on such acquisitions would be no better than those of its own shares. Its return on equity is expected to more than double from 2.6% in fiscal 1998, to 5.6% last year, according to analysts Warburg Dillon. "This puts the stock almost on par with other listed [food and beverage] companies in the region," said its report, "and should make San Miguel indifferent to whether it invests in other companies at a premium or in its own stock."

Others would argue, however, that the right acquisition could raise profitability beyond current levels for buyer and target combined. That isn't totally lost on San Miguel. It is now exploring investments in energy and Internet marketing, sources say. The two areas may be as far removed from food and beverages as apples are from monkeys, but energy and the Internet have enormous potential.

Consider the emerging energy scenario in the Philippines. From 2002, a $4.5-billion joint venture between oil behemoths Shell and Texaco is scheduled to produce nearly a fifth of the nation's projected power needs through natural gas, replacing electricity from crude oil. With environmental standards getting stricter, clean sources of energy such as natural gas are the wave of the future. Asiaweek has learned that the San Miguel board has discussed buying its own gas or petroleum company in recent meetings.

San Miguel's plans for Internet marketing appear more promising. The company is offering is sales network to firms that want to sell consumer goods through the Internet but lack the necessary logistics and distribution systems. With about 500 independent dealers, who own some 2,000 trucks nationwide, the company is well placed to sell just about anything. "We have facilities for domestic distribution everywhere," says Ang. He expects Internet sales to account for 10%-15% of the company's total annual turnover in the not-too-distant future.

In the end, says chairman Cojuangco, San Miguel's expansion efforts will be based on three time-tested elements: the acquisition should have a strategic fit with the firm's core businesses; it should build on the well-known San Miguel brand; and new ventures should provide better returns to shareholders. So will the beer giant buy from within or without? The market will be watching closely.

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