San Miguel Brewery allots P1.3B for capital spending

REPORT FROM BUSINESSWORLD SAN MIGUEL Brewery, Inc., the country’s largest beer producer, expects to spend a total of P1.3 billion in 2007 and 2008 for capital expenditures. In its prospectus for a planned initial public offer, San Miguel Brewery said the capital expenditure program would be funded by internally generated cash and external financing sources, including a P1.6-billion credit line with Bank of the Philippine Islands. The program would also be partly funded through other external sources that can be accessed through the beer company’s mother company, San Miguel Corp. San Miguel Brewery said of the amount, P600 million has been earmarked for this year to supplement equipment capabilities and replacement and maintenance and to make operational improvements. As of September, the soon-to-be-listed firm has spent P343 million or 57.17% of the total amount. Meanwhile, P700 million has been allotted for next year, for repair and maintenance of equipment as well as for operational improvements. "The company’s budgeted capital expenditures are based on management’s estimates and have not been appraised by an independent organization," the company said. It added that the capital expense may change subject to various factors, including new product introductions, tolling arrangements and perceived surges in sales volumes of various products. "There can be no assurance that the company will implement its capital expenditures as intended at or below estimated costs," the wholly owned subsidiary of San Miguel said. Between 2004 and 2006, San Miguel Brewery spent a total of P1.217 billion to improve operations, reduce costs, and maintain performance of major equipment. It said it has historically sourced funding for its capital expenditures from internally generated funds. Prior to the creation of the company, San Miguel’s beer operations were under its business unit called San Miguel Beer Division. San Miguel shareholders approved last July the transfer of its domestic beer business assets in exchange for additional shares in San Miguel Brewery. San Miguel Brewery’s spin-off was in preparation for its initial public offering slated for the first quarter of 2008. San Miguel Brewery is mulling to raise P14.73 billion to P25.27 billion from its primary and secondary offer of 1.55 billion common shares at an offer price of P9.50 to P16.30 per share. Citigroup Global Markets Limited and ATR-KimEng Capital Partners, Inc. were tapped as the joint bookrunners and joint lead managers. Net proceeds of P1.47 billion to P2.52 billion from the primary offer will be used by the company for working capital and general corporate purposes. San Miguel President and Chief Operating Officer Ramon Ang said earlier San Miguel Brewery’s listing would come before the market debut of the regional packaging unit either in the second or third quarter. Leading global beverage research company Canadean Ltd. said the beer market in the country is "highly concentrated" with San Miguel continuing to consolidate its leadership locally. It noted San Miguel has increased its corporate share to 93% in 2006 from 91% in 2000 as a result of strong performance from key brands such as Red Horse and San Mig Light. "For the beer market, the forecast is for a return to a single digit of 5% [growth] per annum in 2007 and 2008 as prices stabilizes and remittances from overseas Filipino workers continue to increase," Canadean said. "High-alcohol beer volume is expected to continue to grow," it added. San Miguel Brewery has five breweries in Valenzuela City, Pampanga, Bacolod, Mandaue and Davao del Sur. It has a highly developed distribution system serving some 500,000 retail outlets. Its beer brands are the top four brands in the country, namely San Miguel Pale Pilsen, Red Horse, San Mig Light and Gold Eagle. San Miguel Brewery expects industry volumes to continue to grow, driven in part by the forecast strong gross national product (GNP) growth of 5% to 6% complemented by low inflation. "Given its strong brands and leading market position, the company believes it is best placed to capture a very large portion of the expected overall growth in the industry," it added. San Miguel Brewery posted an 11.74% increase in its nine-month earnings at P5.71 billion from P5.11 billion on higher sales. The company did not increase its prices amid an 8% increase in excise tax rates effective 2007. Reflecting increased volume of beer sales, San Miguel Brewery said net sales rose 8.56% at P29.44 billion from P29.44 billion. San Miguel Brewery plans to introduce new products and package formats. "The company believes this strategy can increase consumer interest and overall market size, as well as address the needs of an increasingly fragmenting market, especially in high growth segments," it said. Last May, it introduced San Miguel Pale Pilsen in paper label bottles to increase consumer interest and has sold beer products in plastic bottles for special seasonal promotions. "The company intends to continue to pursue packaging innovations and capitalize on the market trend towards convenience packaging. The company is developing packaging improvements for existing brands as well as convenience pack formats consistent with faster-paced lifestyles and addressing the various activities and interest of consumers," San Miguel Brewery said. Meanwhile, plans of parent company San Miguel Corp. to raise at least $500 million through a hybrid bond to fund its move into infrastructure, power, mining and utilities will likely push through next year, Mr. Ang said. "It depends on the appetite of the investors," he said. — Ruby Anne M. Rubio/BusinessWorld