National pride at stake as brewer aims for big time

When San Miguel opened its first brewery in 1890, company legend has it, one well-lubricated guest made a toast that "doubloons will flow forth" with each new barrel of beer.

Those good wishes, in the dying days of Spanish rule over the Philippines, proved prophetic for a company that now sells 90 per cent of the nation's beer and fills shop shelves with its brands of soft drinks, poultry and processed food.

San Miguel has also grown into the largest food and beverage group in Southeast Asia and hopes a US$1.37 billion ($1.49 billion) bid for National Foods, Australia's biggest milk producer, will help it break decisively into the big league.

Recent Asian acquisitions include a Thai brewery, a pig farm in Vietnam and half of Australian juice maker Berri.

National Foods is, by far, its most ambitious target.

The deal would also be a rare takeover of a developed-world company by a poor-country buyer, underlining why San Miguel is a source of national pride in the Philippines.

But the company must address concerns it might be paying too much, possibly stretching its resources too thinly.

The US$1.4 billion market capitalisation of National Foods, known in Australia for its Pura Milk and Yoplait yoghurt brands, is more than a third of San Miguel's US$3.8 billion.

San Miguel plans to fund the purchase with a rights issue, but that is unlikely to cover more than a third of the cost, meaning it may have to add to debt of about 32 billion pesos ($824 million) as of last September.

Jojo Gonzales, managing director of Philippine Equity Partners, said investors had reason to be sceptical, given the failure of San Miguel's acquisitions to deliver results so far and the possible impact on its balance sheet.

"They haven't really delivered in terms of profitability," he said.

Another analyst said National Foods' net profit of A$68.7 million ($76 million) in the year to last June meant San Miguel would get a less-than-spectacular profit yield of about 3.7 per cent on its near A$1.4 billion investment.

"They're paying a huge premium," he said. "It's not something that would jump out at investors [as a good deal]."

Still, most believe in San Miguel's basic strategy and warn against underestimating chairman Eduardo Cojuangco, a former ally of the late dictator Ferdinand Marcos, who has overseen the expansion and a tie-up with Japan's Kirin Brewery.

Kirin's purchase last week of an extra 4 per cent of San Miguel, taking its stake to nearly 20 per cent, was widely seen as a move by Cojuangco to shore up his grip on a company that has been a political football since Marcos was ousted in 1986.

Cojuangco invited Kirin to take the stake and the Japanese company tends to vote its shares with him.

Jitters over Government claims on a 47 per cent chunk of San Miguel stock, which it says Cojuangco acquired illegally via his ties with Marcos, have rocked the share price in the past.

Most believe the man known as "The Boss", with Kirin as an ally, is unlikely to be ousted, despite a court ruling last month awarding the Government a 27 per cent chunk of shares bought by Cojuangco with a Marcos-era tax on coconut farmers.

The Government says it plans to hang on to its stake and its seven seats on the 15-seat board until final court decisions enable it to sell the shares on behalf of millions of farmers.

A San Miguel official said the Berri and National Foods acquisitions could be making a contribution to results as early as the second quarter of this year.

But San Miguel's bid for National Foods could still face competition from New Zealand dairy group Fonterra and analysts say the brewer's share price looks expensive.

- REUTERS