Divestment surprise from San Miguel

REPORT FROM BUSINESSWORLD Food and beverage giant San Miguel Corp. seems to have reversed its strategy a few years after embarking on an ambitious expansion plan which included buying out other conglomerates in the Asia-Pacific region. San Miguel, which implemented an aggressive regional expansion plan from 2003 to 2005 - initially purchasing brewery assets in countries like Thailand and Vietnam, then later on eating up firms like Australian firms Berri, Ltd. and National Foods, and Singapore-listed Del Monte Pacific Ltd. — appears to now be in a consolidation mode, this year having sold off its interest in two major firms — Coca Cola Bottlers Philippines, Inc. (CCBPI) and Del Monte Pacific. In January, San Miguel announced the sale of its 60% stake in CCBPI to partner The Coca-Cola Co. for $590 million. And while the Eduardo Cojuangco-led firm’s sale of the controlling stake in CCBPI did not come as a surprise - there had been rumors of disagreements between the partners - Friday’s announcement that it was selling its 42.2% stake in NutriAsia San Miguel Holdings Inc., the joint venture company which owns 84.5% of Del Monte Pacific, to its partners apparently caught the market unawares. San Miguel’s announcement of the stake sale, for $150 million, was made a day after the firm held its investors’ briefing, and on the same day that a state pension fund, the Government Service Insurance System (GSIS), announced its divestment of a 6% stake in the food and beverage firm for P14 billion. Ramon S. Ang, San Miguel president and chief operating officer, said in a statement that the sale of the Del Monte Pacific stake was part of a larger strategy to "drive growth for our company by concentrating our resources in areas where we have full control and the strongest competitive positions." Keeping to the official line, company sources said the publicly-listed firm will prioritize cleaning its balance sheet and strengthening its businesses. "We have so many debts. Our priority will be debt retirement. We are looking at refinancing them. Also, we like to divest our low return businesses. NutriAsia is a good business partner; it was a very friendly transaction. We are focusing on the growth of the remaining business with high returns," a source said. Analysts could only offer theories for the change in the firm’s strategy. Astro del Castillo, managing director of First Grade Holdings, Inc., said San Miguel may simply be eyeing investments with a greater revenue return. "If they think that selling Del Monte will allow them to invest in a different project with a better [return of investment], then that’s a business decision." Ron Rodrigo, head of research for Unicapital Securities, Inc., agreed. "They will probably use it for expansion. It’s additional capital for the company if they want to invest in other projects." The San Miguel source also indicated that the company may invest in new businesses while at the same time enhancing its existing businesses. "San Miguel has a lot of brands. We have Berri and Magnolia for juices. Magnolia a major brand in nonalcoholic beverages. That in itself is a major contributor. The top priority is bring leverage to a more comfortable level. We are realigning our operations," he said. Magnolia, Inc. manufactures butter, margarine and cheese, and is the exclusive manufacturer and distributor of Star Dari, Inc.’s Star Margarine and Dari Creme. Magnolia accounts for a substantial share of the cheese market, through the Magnolia brands. In May 2003, Sugarland Corp. (Sugarland) became a wholly-owned subsidiary of Magnolia. Sugarland currently toll-manufactures the products of Magnolia which handles the selling and marketing of Jelly Ace products. Recently, the firm also put up San Miguel Beverages Inc., a nonalcoholic beverage unit. Joseph Roxas, president of Eagle Equities, Inc., said San Miguel may have used the amount it raised from the sale of Del Monte Pacific to buy back the 6% stake of GSIS in the company. "It may have been part of a shifting of funds for the share purchase," he said. GSIS president Winston F. Garcia, in announcing the P14-billion stake sale, declined to identify the buyer. San Miguel may also have decided that its stake in Del Monte was too costly, Mr. Roxas said. "If San Miguel sold their stake at a loss, they may have realized that they spent too much to purchase the company in the first place, and they’re trying to get out," he said. San Miguel and NutriAsia, Inc. in December 2005 bought a 49.76% stake in Del Monte Pacific Ltd. for $420 million. Both later increased the stake to 84.52% after a tender offer. Even at the price at which San Miguel and NutriAsia bought the 49.76% stake in Del Monte Pacific, last Friday’s sale appears to have been made at a loss. San Miguel’s 2006 financial statement is yet to be submitted to the Philippine Stock Exchange, although the company has reported a 17% growth in net income to P10.6 billion from P9.03 billion on better margins and controlled manufacturing costs. In its third quarter financial statement, the company said its debt-to-equity ratio was unchanged at 1.45. It did not indicate how much debt it had. Del Monte Pacific Ltd. produces, markets, and distributes processed food products locally under the Del Monte brand name. It also owns the Del Monte brand in the Indian subcontinent and produces a juice line in China, and has long-term contracts to supply canned pineapple, juice and mixed tropical fruits to North America, Europe and East Asia. The firm reported a net profit of $21.0 million in 2006, a 13% increase from the previous year. Under the terms of the sale, Campos-led NutriAsia will acquire SMC’s 42.2% stake in NutriAsia San Miguel Holdings. SMC will receive $150 million as consideration for the shares and other interests. It will no longer have any equity interest in Del Monte Pacific after the sale closes. — from reports by Allan E. Lalisan and Ruby Anne M. Rubio/BusinessWorld