A Fight Brewing over San Miguel
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San Miguel Brewery, part of the massive San Miguel Company that is the largest conglomerate in the Philippines, may have to de-list along with two other divisions due to a change in the rules of the Philippines Stock Exchange (PSE). SMB, San Miguel Properties and San Miguel Pure Foods must to raise their publicly offered stakes to the minimum of 10% of the companies’ total shares or face being de-listed by the end of the year. These changes were made to improve liquidity and bring added attention from foreign investors to Filipino companies. It has worked.
Between extending trading hours gradually all year from closing at noon to closing at 3:30pm local time and the new requirements on availability foreign investment so far this year has added $2.2 billion in foreign ownership to a bourse whose total value is $198 billion. Trading volume is up 24.5% year over year as foreign investors tired of microscopic yields in western ‘safe-haven’ assets have pushed the PSE Index up 18.8% year to date.
If SMC chooses to de-list these divisions they will be barred from re-listing for five years, thus cutting them off from potential investment capital. SMC would need to raise at least $1.8 billion which would be very difficult in the current economic environment. SMC’s president Roman Ang has made it clear that SMC would ‘voluntarily delist’ the business units before diluting the company.
The threat to delist is real as minority owner Kirin (48%), a subsidiary of the larger Japanese conglomerate Mitsubishi (NYSE: MTU), has no interest in selling any of its stake and Ang is not interested in dilution to placate his political rivals. Ang, one of the most powerful men in the Philippines, is the head of both SMC and SMB. He also serves as either COO, President or is a board member in 20 different organizations spread across more than 20 different industries, both domestic and foreign. A full list of all the owners of SMC is not available but the company wields considerable political power.
SMC is revered as a symbol of national pride and has a strong patriotic brand value locally. The firm represents the cultural and economic shift from Spanish and American rule to Filipino independence. Consumption of their goods is a tangible link to freedom for many Filipinos. This was crafted by decades of effective marketing and branding that, along with the government running interference, have practically created a monopoly in the beer drinking market.
Because of this opportunities for competition to SMB to come into the Philippines are routinely stymied by SMC, using their pull to keep competition from putting in local breweries. So, while Southeast Asia is a huge growth center for alcohol consumption and the Philippines is well below the average per capita rate compared to its peers there is limited potential for SMC’s competitors like Anheuser-Busch Inbev and Heineken to enter the market on equal footing..
Diageo (NYSE: DEO), which has a very robust expansion plan throughout Southeast Asia, especially in Vietnam, Indonesia and Singapore sold their bottling facility in Laguna to Alliance Global Group, headed up by local tycoon Andrew Tan to internationalize their Emperador and Generoso brands of brandy. The move was a rare step backwards by Diageo in this region whose business in this region has steadily grown through local distribution integration and building local variants suited to Asian tastes, the chief example of this is their Johnnie Walker Gold Label Reserve.
The real question is whether liberalizing the Philippine exchange in conjunction with the rapid growth of tourist travel, total air passenger growth in 2011 was 15%, 3rd highest behind Chile and Brazil, to will bring in more investment capital to the country and a gradual change in the beer market overall, chipping away at SMC’s dominance over the industry in specific and the economy in general. DBS Group just raised their GDP target for the Philippines for 2012 from 5.3% to 5.6% suggesting, like Indonesia and Malaysia that ASEAN is weathering the turbulence of the current global economic situation better than was originally expected.
San Miguel trades in the U.S. under the pink sheet ADR ticker symbol SMGBY and in the Philippines under the ticker SMB. Currently it is trading at a P/E of 43, having risen more than 10% on the news of potential de-listing. Their most recent earning report was notable for double-digit growth in Hong Kong, Indonesia and Thailand, since there is no room for growth where one already sells nearly 9 out of every 10 bottles of beer sold.
The Philippines industry and San Miguel is significantly represented in iShares MSCI Philippines Investable Market Index Fund (NYSEMKT: EPHE), which has been one of the top performers in the entire region, increased by an impressive 26.5% since year-to-date. With relatively low per capita beer consumption statistics and solid economic growth the Philippines should support slow organic growth for San Miguel. Building market share into its neighboring markets which are exhibiting explosive alcohol consumption growth makes this an intriguing long term play if management makes more of the company available for public ownership.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Diageo plc (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
