Philippine conglomerate San Miguel Corporation on Friday started to sell shares worth as much as Ps33.1 billion ($619 million) in its food and beverage operations. This is the final step of a massive business restructuring that has lasted for more than a year.
San Miguel Food & Beverage’s highly anticipated share offering has been tipped by many investors and analysts as a defining moment for the country’s equity capital market because it is the biggest fully marketed equity transaction in US dollar terms since the $650 million initial public offering of Robinson Retail Holdings in 2013.
In fact, the market had higher hopes for the century-old conglomerate when it applied to sell a 20% stake in the F&B business in August.
At the time, the shares were worth some $1.7 billion based on the prevailing share price. Such a deal could easily have outsized any equity offering in Philippines’ history, including the partially marketed $1.2 billion rights issue from BDO Unibank last year.
It appears to be a wise move to scale back the share sale after a massive selloff in both domestic and international stock markets.
More to the point, the Philippines has the worst performing stock market across the region. It has lost nearly 17% of its value since the beginning of the year, and the benchmark Philippine Stock Exchange Index is trading at its lowest level for more than 18 months.
What makes matters worse is the fact that market sentiment has turned sour since San Miguel filed for the share sale two months ago, amid growing concerns of an intensified trade war between China and the US.
Central bank governor Nestor Espenilla has warned that any escalation in the ongoing trade friction could severely impact the export-oriented economy.
CONSOLIDATION
According to the deal terms released on Friday, San Miguel will sell 348.6 million existing shares equating to only 5.9% of the total number of outstanding shares with an upsize option of another 2.9% stake.
It is clear that San Miguel is going for the smallest deal possible to meet the stock exchange's 10% minimum public ownership requirements. The food and beverage unit already has a 4.1% free float. The 5.9% sale now allows the company to comply with these requirements by the end of the year.
The conglomerate accumulated the bulk of the shares after the group consolidated its food, beverage and brewery businesses into the newly established San Miguel Food & Beverage. This was through a mega merger between three listed entities – San Miguel Pure Foods, Ginebra San Miguel and San Miguel Brewery.
San Miguel said that the consolidation, which took more than a year and completed in June through a $6.6 billion share swap, helps optimize the market knowledge, customer access, distribution and logistic network of the food and beverage business as a whole.
The conglomerate also said that it could benefit from the synergies and cost savings from shared infrastructure and group-wide procurement.
Sources familiar with the situation said that the bookrunners of the share sale had collected sufficient demand from anchor investors for the full size of the transaction ahead of the launch, which should provide more comfort for other prospective investors.
ICONIC BRAND
In any case, the share sale by San Miguel Food & Beverage is something for Filipino people to cheer about. After all, they are presenting perhaps the best-known domestic brands to international investors.
The company’s portfolio includes 32 food and beverage brands across six categories, including Red Horse, the country’s top-selling beer, and Ginbera San Miguel and Vino Kulafu, its top-selling spirits.
It should be no surprise that the business has one of the country’s largest distribution networks. This includes more than 400,000 beer outlets, 141,000 spirits outlets and 130,000 points-of-sale for its food products, which include biscuits, ice cream, poultry and meat.
The combined business of San Miguel Food & Beverage achieved pre-tax profit of $933 million on $4.7 billion revenue last year, which made it the most profitable consumer business in the Philippines.
The company’s scale is so big that it forms a significant part the local economy – its total sales were equivalent to 1.5% of Philippines’ gross domestic product last year.
Its pre-tax profit is nearly 2.5 times that of local rival Universal Robina, the consumer food and beverage group behind the iconic Jack ’n Jill brand, which reported $390 million in profit last year.
VALUATION
Still, the company is being marketed at a slight discount to Universal Robina on a forward price-to-earnings basis.
Syndicate analysts assume that San Miguel Food & Beverage’s implied valuation of $9.4 billion to $10.5 billion represents 26.1 to 29.2 times earnings this year, while Universal Robina is trading at around 31.1 times.
Based on next year’s earnings, San Miguel Food & Beverage will be valued at 22.8 to 25.5 times p/e versus 27.4 times for Universal Robina. These are based on the selling price of Ps85 to Ps95 per share.
Institutional investors, particularly overseas investors, will play a key role to the success of the share offering as they will be allocated 97% of the deal, while retail investors will get only 3%.
International roadshow and bookbuilding for the fully-marketed block trade, also known as a re-IPO, will take place until October 24, with pricing and allocations finalised a day later.
Joint global coordinators of the transaction are JP Morgan, Morgan Stanley and UBS.
Joint bookrunners are Deutsche Bank and Goldman Sachs, and local lead underwriters are BDO and BPI. Standard Chartered is the sold financial advisor.
