Generations of the low-profile Zuellig family have steered one of Southeast Asia’s biggest trading houses for over a century, but last year the patriarch’s death sent shockwaves through the business empire. The ensuing conflict over the direction of the group could lead to either a sharper, more focused organisation, or a gradual decline.
The chairman of the Zuellig Group, Stephen Zuellig, died in January last year at the age of 99, leaving behind four children: Susan, Peter, Joan and David, and a multi-billion-dollar business that spans pharmaceuticals, agricultural equipment, insurance and property.
In a rare interview, Stephen’s eldest son Peter sheds light on the inner workings of the privately run business, which stocks hospitals and pharmacies across Southeast Asia with drugs. He also revealed the thinking behind the Zuellig Group’s purchase in April of a 20% stake in Zuellig Pharma from Singapore’s sovereign wealth fund Temasek and the sale of a 75% stake in animal feeds firm, Gold Coin, to another family-run conglomerate in the Philippines.
His father, he said, was a “natural leader” who had left a “void” at the group he has inherited.
Peter spent decades working in various parts of the family business, and after Stephen died he unofficially stepped up to take his place. He has worked to reinvigorate the historic company and shake off some of the lethargy that had crept in during recent years.
The business was founded by Peter’s grandfather, Frederick Zuellig, who sailed to Manila from Switzerland to seek his fortune in 1901, the year the short-lived First Philippine Republic was formally crushed by the country’s new colonial masters, the Americans, after the US military defeat of former rulers Spain three years earlier.
Frederick's sons, Stephen and his younger brother Gilbert, were born in Manila. They survived the Japanese occupation of the Philippines and rebuilt their father’s distribution business after the devastation of the Second World War into the Zuellig Group.
The Zuellig Group had an annual turnover of around $12 billion in 2012 and since then it has sold its China business, which had annual sales in excess of $1 billion to Cardinal Health Inc., as well as its animal nutrition division, known as Gold Coin, Peter explained. However, since the company is private it generally does not disclose its detailed financials.
Peter’s trust fund, together with the family’s trust, now own the Zuellig Group. Peter is one of four members on the family’s board (separate from the management board) at the Zuellig Group. The others are his two cousins, Thomas and Daniel, and a family lawyer.
HEART OF THE EMPIRE
The Zuellig Group’s largest operating business, Zuellig Pharma, has grown into one of the region’s largest distributors of drugs across 13 Asian countries.
It takes pharmaceuticals from Big Pharma to clinics, hospitals and pharmacies around the region, often in temperature-controlled boxes to protect the drugs’ active ingredients from deteriorating in tropical climates.
Zuellig Pharma generates about $11 billion in annual sales, according to a person familiar with the company’s financials.
For all that, though, it has stagnated in recent years, say insiders. Management, fretful about competition in the digital age, has lacked an aggressive growth strategy, been relatively easy-going with customers, and treated it more like a cash cow.
“The company could perform better,” said Peter, whose trust owns a minority stake in Zuellig Pharma and is pushing the group’s professional managers to create a more asset-light, tech-savvy and focused business with the best geographical footprint in the business.
Singaporean state fund Temasek first invested in Singapore-headquartered Zuellig Pharma back in 2007, but put its 20% stake up for sale last year. It was disillusioned as the company appeared to be drifting, according to people familiar with the matter.
“In a dynamic area like Asia that’s a slow death,” Peter told FinanceAsia.
The Zuellig Group has a pre-emptive right to buy back the 20% from Temasek, but management was undecided whether they wanted to exercise that right and negotiations were protracted.
One investment bank flagged a $1 billion price tag to an array of other companies on behalf of Temasek.
And a close rival, DKS Holding, expressed an interest in acquiring the whole group, eyeing its strength in the Philippines and in Indonesia. However, it passed on the prospect of merely a minority stake.
“When the company comes officially for sale, we would be interested to look at it and talk. As of today, that is not the case. We assume that they are dealing with the recent changes and making up their minds how they want to take the company forward,” Zurich-headquartered DKSH’s chief executive, Stefan Butz, said on July 13 during a call with analysts.
So Peter stepped in to negotiate a speedy deal with Temasek.
In the end the price paid was far below $1 billion but Temasek still made a capital gain on its investment, people familiar with the deal said.
Ironically Peter, a graduate of the faculty of law at University of Zurich, says he finds the minutia of terms and conditions for deals boring and likes to cut to the chase during acquisition talks.
“I had the deal within less than a week, only over the phone. We found a way which was going to make everybody happy,” Peter said without disclosing the final price paid.
One key reason Peter thought the Zuellig Group should take full control of Zuellig Pharma is because Asia’s burgeoning middle classes, from Myanmar to Indonesia, are spending more on their healthcare.
Also, the company has a relatively defensible position against digital disruptors such as DHL, Amazon and China’s JD.com. Pharmaceutical distributors need licences to operate in each jurisdiction – which represent a high barrier to entry for competitors.
Peter is well incentivised to make the right call. As a beneficiary through a trust in the Zuellig Group, Peter is an indirect, double-digit shareholder in Zuellig Pharma.
He also knows the operation well. Peter was joint chief executive at the Zuellig Group between 1991 and 2000 then sole executive director between 2001 until 2005. In 2005 Peter brought in a professional to replace him, former Australian flag carrier Qantas Airways executive Bill Meaney.
During Peter’s leadership the group was growing at an compound annual clip of about 20%.
RARIFIED UPBRINGING
As a scion of the Swiss-Filipino dynasty, Peter had a rarefied and cosmopolitan upbringing. Born in the Philippines, he is also a Hong Kong-resident and is applying for residency in Monte Carlo. “It’s a bit difficult to pin me down,” he said.
Peter’s relationship with his father and his career at the family group shapes how he thinks the business should be run. Stephen cut off Peter’s allowance when he was 28 to prompt him to work, after he had completed his postgraduate studies at Columbia University as well as at Harvard Business School. So for a few years he worked on his golf handicap, a passion he still enjoys. Then he got serious.
At 31 years old he moved to Singapore to the family’s animal feeds business, Gold Coin previously known as Zuellig Feedmills (Malaya), as an assistant to the chief executive.
For a couple of years Peter tramped around the feed mills, finding weevils in his pockets and all sorts of bugs in his car. In one mill in the 1980s, Gold Coin’s staff kept two pythons living between the feed bags to catch and eat the rats that would otherwise ruin the harvest.
Once a prize asset within the group, it too has stagnated. The future of Gold Coin has periodically been under review since Peter’s uncle and Stephen’s brother Gilbert passed away in 2009.
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Peter spoke to his father about selling him Gold Coin, which he did in August 2014. Peter paid for it with a $20 million personal gift from his father and the rest was borrowed from the family. Then he set about revamping it.
Gold Coin’s profits had been stalling, despite a sound business model. Gold Coin, which makes mostly poultry feed, does not own farms unlike many of its rivals in Asia, so it can pass on fluctuations in commodity prices to the farmers that buy its feed. It also generally eschews the risky practise of extending loans to farmers.
After Peter took control he was strict about capacity utilisation at the firm’s 20 livestock and aqua feed mills. Gold Coin has about 3 million tonnes of capacity and produces about 1.8 million tonnes, more efficiently than its peers.
“There is generally an overcapacity in Asia … I would assume that most mills on average operate at less than 50% capacity,” he said.
Peter also overhauled management: “They were the wrong people for that particular business, in that region,” he said. Of the top 11 managers by salary when Peter took over, nearly all were no longer with the company by the middle of this year.
Then 68-year-old Peter unexpectedly took time out from work for about a month with a health problem. He also had to repay the acquisition loans to his family in cash after the passing of his father, part of which would come back to him as one the beneficiaries of his father’s estate.
This combination of events made him reassess his workload and the future of the group.
His daughter is not involved in the family businesses, she is an architect living in London. “I am not seeing this dynastically,” he said wistfully.
So Peter started preparing to list Gold Coin in four or five years’ time, then changed course to a sale of 75% of the business. Credit Suisse helped him parse a list of potential buyers.
During the sale of the animal feeds firm he drew upon many of the lessons he has learnt over the years about deal making. He cut out rivals from the process whom he felt would just be window shopping or seeking out trade secrets.
The highest bid came from a Western feed giant, keen to establish a platform across the relatively fast-growing economies of Southeast Asia. Established in 1953 in Singapore, Gold Coin has operations across 11 countries, including Indonesia, Malaysia and Vietnam.
However, Peter preferred to let control of Gold Coin go to the Aboitiz family, whom his own family has known for generations. Gold Coin is larger than the Aboitiz’s food arm, Pilmico International, so Aboitiz is likely to lean upon the target company’s brand and connections, rather than subsume its identity into the group.
"A company has a right to continue, it was always attractive to me that Gold Coin wouldn't just be a platform for somebody to step into Asia but for somebody within Asia to step up," Peter said.
He was also looking for someone who would take control and responsibility for the business but also welcome his advice going forward. The Aboitiz family fitted the bill.
“With Aboitiz there are people who want to build the business, it’s a clan. There are many of them around and it’s nice to see that they get along among each other. It’s not a given.”
Peter sold 75% of Gold Coin for $334 million, making it the largest animal feeds acquisition ever across Southeast Asia, according to data provider Dealogic.
He kept the remaining 25% stake and feels the valuation was fair to both sides.
"You have to leave something on the table for the next owner, particularly if you are going to stay in the business. You can't sit comfortably across from the table from your partner if he knows you've been squeezing the business," Peter said.
The acquisition was part funded by loans from MUFG Bank, Mizuho Bank, DBS Bank and Standard Chartered Bank. Allen & Overy advised on both the M&A and financing aspects.
FISHY BUSINESS
In addition to the minority stake, Peter kept part of the Gold Coin business, a prawn genetics operation called SyAcqua.
He is also the owner of a naturally-reared freshwater tilapia company called Regal Springs, which was founded by another Swiss entrepreneur, Rudolf Lamprecht in Java. Peter describes the firm as the biggest of its kind in the world in terms of revenue, with about 8,000 staff and over 50% market share in the US in terms of weight sold. Among its clients are Costco Wholesale and Kroger.
Tilapia, also known as Saint Peter’s fish or the chicken of the sea, is American’s fifth most consumed fish dish, according to the National Fisheries Institute.
Peter said he sees a shift away from cheap imports of tilapia as consumers become more aware of the high-dosages of antibiotics habitually used in intensively farmed fish, not least in China and Vietnam, where some tilapia producers feed fish in a way that makes them accumulate more water so they fetch a higher price by weight. Regal Springs does not use antibiotics, hormones or pesticides and farms tilapia in a sustainable manner.
After decades spent working in Asia he is well aware of those types of business tricks and seen some of them first-hand. For example, when the Zuellig Group made toilet paper in the Philippines in the 1960s there was some cheating going on, Peter admits: “We would write on the pack it has 400 sheets and it had maybe 300, but the competitors were also writing 400 but they only put in 180 or so!”
However, he now thinks it makes sound business sense to ensure the quality and traceability of products. This is because Asia’s emerging middle classes are better educated. “Increasingly you are not going to get away with it,” he said.
To help improve traceability in the food chain his companies are exploring how seafood can be identified and traced through genetics. A far cry from his business’s roots.
When Peter’s grandfather set up his business in Manila, European trading houses dominated the commercial life of Asia. The Zuellig Group is one of the few to survive and transform themselves into a multinational business. Other notable trading house in the region include the Swire Group and Jardine Matheson.
“Some of the old families disappeared and went back to where they came from, but we stayed on. My family was probably different because we were traders and therefore were more mobile and regional, and it has worked very well,” said Peter.
Is he wedded to his family’s legacy? He thinks it needs to focus on fewer businesses, bring in entrepreneurs and dispose of assets.
“If someone really believes in the business and can make more from it and they love it exemplified by a good price, my saying is you have to cry all the way to the bank. Take the next step in your life,” said Peter.
With assistance from Molly Jackson
