Pepsi Philippines pulls off IPO in tough market

Pepsi-Cola Products Philippines was able to attract enough international investors to its initial public offering to guarantee the listing will go ahead, despite a 9.6% loss in the Philippine stockmarket last week.

Observers say the fact that the listing candidate, which is the exclusive licensed bottler of PepsiCo in the Philippines, is a play on domestic consumption may have saved the deal at a time when investors are fretting about a global fall-out from a potential US recession. Even if the local economy were to take a hit, soft-drinks are unlikely to be among the first things people have to cut back on –- or so the argument goes.

Euromonitor expects liquid refreshment beverages (including carbonated soft drinks, sports drinks, bottled water, ready-to-drink tea and coffee, fruit drinks, energy drinks and concentrates) to continue to grow in the Philippine as the consumption per person is still well below that in developed countries like Hong Kong, Singapore and Korea. According to projections published in the listing document, the research firm expects the consumption volume to increase to about 70 litres per capita from 56 litres in 2005, supported by a strong preference for Western food and drinks among the local population.

However, investors were by no means immune to the sell-off in Asian stockmarkets, which has been gathering pace in recent sessions, and the IPO price was fixed at the bottom of the offering range at Ps3.50 per share. This gives a total deal size of Ps4 billion ($111 million), of which 70% will go to international investors.

When the international portion of the offering closed last Friday, the total deal was about 1.3 times subscribed by international accounts, which means the deal is in the clear even if there is no interest at all from domestic investors. The latter is of course highly unlikely. The domestic offering opened yesterday and will run until January 28.

Only about 20 or so international investors participated in the deal, according to a source, and they were primarily long-only and value-oriented accounts. If correct, that should give the stock support when it starts trading on February 1.

“At the final price, the stock is valued at only 4.7 times on an enterprise value-to-Ebitda basis, which makes it a real value play,” the source says. "It is also operating in a sector that is pretty subprime proof.”

The comment refers to the impact that the value collapse of subprime-related products continues to have both on the earnings of global investment banks and the availability of credit for companies around the world. The crisis is seen to be largely responsible for the fact that the US is now balancing at the edge of a recession, having set off a 10% drop in US house prices over the past few months. A local producer of Pepsi is not that likely to be affected by these woes though and the investors who chose to buy into the deal no doubt recognised this.

The company also looks reasonably cheap versus its closest comparables on a price-to-earnings basis, although the initial discount has shrunk as the other companies have seen their share prices fall during the two-week roadshow. Pepsi-Cola’s IPO price translates into 10 times its 2008 earnings, while other Philippine food and beverage makers such as San Miguel and Jollibee Foods were quoted at an average of about 16 times at the start of this year. Since then, San Miguel has fallen 6.8% and Jollibee has lost 16.3% of its value.

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.

Pepsi-Cola is raising money to expand the production capacity at its 11 plants both of carbonated drinks, including 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.)

In its listing prospectus the company says it believes that its “ability to execute new brand and product launches, particularly in the non-carbonated beverage space, will be key to [its] future success.” But because the company is able to take new products developed by PepsiCo and market them in the Philippines, it doesn’t need to spend a lot of money on product development. It is also looking to expand its distribution network, which currently comprises about 275,000 outlets, with the aim of capturing market share from Coca Cola, which is its key competitor in the carbonated drinks segment. The local bottler of Coca Cola is 100% owned by the US drinks giant and a market leader both in terms of revenues and sales volumes.

The IPO comprised a total of 1.14 billion shares, or 30.9% of the enlarged share capital, which included the 30% of the deal that was earmarked for domestic investors. The shares were offered at a price between Ps3.50 and Ps4.30 each and priced at the bottom. There is a 15% greenshoe, which could increase the final size to as much as $128 million if exercised in full.

Two thirds of the offering consisted of existing shares that were 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 aside from access to its new products also provides the company with concentrates and marketing support, will own 29.5%.

UBS is the sold global coordinator and international bookrunner for the offering, while the domestic share sale will be jointly arranged by ATR KimEng and BDO Capital & Investment.

Pepsi-Cola will be the first company to list in the local market this year. Cebu Air, which operates regional budget flights under the name of Cebu Pacific Air, is also currently in the market with a UBS-led IPO of up to $288 million, although observers say this will be a tough sell in the current market environment.

Asian stockmarkets tumbled across the board on Monday after a $150 billion plan presented by President George W Bush to revive the US economy and expectations of interest-rate cuts failed to ease recession concerns. Among the worst losers were India, where the Nifty index fell 8.7% and the Bombay Sensex index dropped 7.4%; Singapore lost 6% and Hong Kong was down 5.5%. By comparison, the Philippine market actually held up quite well with only a 0.5% drop, although it is one of the worst performers so far this year with a combined loss of 12.5%.

Romulo Mabanta Buenaventura Sayoc and de Los Angeles, and Skadden, Arps, Slate, Meagher & Flom acted as legal advisers to Pepsi-Cola, while Picazo, Buyco, Tan, Fider and Santos, and Allen & Overy advised the international and domestic underwriters.