Local Pepsi bottler seeks Philippines listing

Pepsi-Cola Products Philippines kicked off its international roadshow for a local listing yesterday. The licensed bottler of PepsiCo in the Philippines is aiming to raise between Ps4.0 billion and Ps4.9 billion ($111 million to $136 million).

The pricing will be determined on January 18 and will be followed by a domestic share sale between January 21 and 28. The trading debut is scheduled for February 1. This deal will be followed hot on the heels by a long-awaited initial public offering by Cebu Air, which will seek about $200 million, according to sources. The regional airline has started pre-marketing and is expected to launch a formal international roadshow next Monday with the pricing set for January 25.

UBS is the sole global coordinator and international bookrunner for both these IPOs, suggesting it isn’t about to let go of its position as the most active international investment bank in the Philippines, which the bank cemented in 2007.

Both deals will, however, be a test of whether investors are still keen on Philippine stocks after the local stock market has fallen 6.4% so far this year amid concerns about the possibility of a recession in the US. The fact that both Pepsi-Cola and Cebu Air are linked to the domestic spending story should help underpin the demand although the airline will likely be hampered by the high fuel prices.

Pepsi-Cola, which is the exclusive distributor of Pepsi products in the Philippines, is raising money to expand its production capacity of carbonated drinks such as Pepsi, SevenUp and Mountain Dew, and non-carbonated drinks. The latter segment, which includes juices, iced teas, sports and energy drinks and vitamin waters, has grown significantly since the company moved into this business in 2004 with five brands and more than 80 products launched so far (including new flavours, packages and sizes.) Among other things, it intends to install “combi” lines which can produce both carbonated and non-carbonated drinks for plastic bottles or glass bottles in at least four of its plants by 2009. About a quarter of the estimated net proceeds will be spent on adding production capacity of plastic PET bottles at several of its 11 manufacturing plants.

The company also plans to increase the reach of its distribution network, although none of the IPO proceeds will be set aside for this. Among other things, the company will be investing in additional returnable glass bottles (RGBs) plastic cases and in-store refrigeration equipment. Most carbonated drinks in the Philippines are sold in RGBs and, according to Pepsi-Cola, it is one of only two drinks manufacturers to have a nationwide platform for the distribution and collection of these bottles.

By increasing its distribution network – it currently distributes its drinks to about 275,000 outlets such as supermarkets, restaurants, bars and small grocery stores – the company hopes to also increase its market share and extract greater profitability out of its existing brands. Its main competitor in the carbonated drinks segment is the Coca Cola bottling business in the Philippines, which is 100% owned by the US drinks giant and the market leader both in terms of revenues and sales volumes

It also aims to diversify its product portfolio further, particularly by tapping into the growing demand for non-carbonated beverages associated with health and wellness.

The company reported a net profit of Ps1 billion ($22.2 million) in the year to June 2007, up 15% from the previous year. In the first three months of the current fiscal year (to September 30, 2007) the net profit reached Ps146.5 million. Revenues amounted to Ps12.9 billion in the year to June and Ps3.2 billion in the three months to September. Pepsi brand products accounted for 48.4% of its sales revenues in fiscal 2007 and 53.7% of the sales volume.

The IPO comprises 1.14 billion shares, of which 761.6 million or two-thirds, are existing shares sold by the Guoco Group and the Nassim Fund. The Guoco Group, which acquired the company in 1997 from the associates of the Lorenzo family, will see its stake fall to 30% following the IPO from 40.3% before. The Nassim Fund, which currently holds 21.6%, will sell virtually all its shares and will hold only 0.2% if the 15% overallotment option is also exercised in full. PepsiCo, which provides the listing candidate with concentrates, marketing support and access to its new products, will own 29.5%.

The shares are offered at a price between Ps3.50 and Ps4.30 each, which will value the company at 10 to 12 times its projected 2008 earnings. This is much cheaper than its benchmark comparables with sources saying that other Philippine beverage makers such as San Miguel and Jollibee Foods traded at an average 2008 price-to-earnings ratio of 16 times at the beginning of this year.

Given the decline in the broader market in recent days, the discount has shrunk somewhat, however. International players, including licensed Pepsi and Coca Cola producers in other countries, were quoted at an average 2008 P/E multiple of about 20 at the beginning of the year.

The wide discount is seen as a direct response to the fact that Asian equity markets in general have had a tough start to the year. Bankers say they believe there will be sufficient demand for good quality companies as long as the valuations are reasonable, but they also acknowledge that at the moment the IPO market is very much directed by the buy side.

“Good deals will get done easily, but bad deals could be tricky,” one banker notes.

Pepsi-Cola’s domestic tranche will be arranged by ATR KimEng Capital Partners and BDO Capital & Investment.