San Miguel sets the stage for bigger venturesFull Year 2010 Results

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With the changes that have come alongside a shift in strategy, senior management meetings at San Miguel Corp, the Philippine food and drinks giant, have begun looking more like a caucus of government officials.
Ramon Ang, 56, San Miguel president, says he spends much of his time in meetings with the heads of the group’s power, toll roads, water supply, mining and telecommunications units, many of whom used to be senior government officials.
The officer in charge of San Miguel’s power business used to be president of the state power grid company, while the chief consultant on mining and energy formerly headed the mines bureau. Mr Ang has also recruited from the state water company and the public works department.
“They have brought with them over 20 or 30 years worth of knowledge and information,” says Mr Ang. That “technology transfer” has been a boost to San Miguel’s diversification into power generation, petrol refining, infrastructure and mining, he adds.
Since launching a strategic shift to faster-growing businesses in 2008, San Miguel has acquired 68 per cent of the country’s biggest petrol refiner, 33 per cent of its largest electricity distributor. It has acquired the rights to over 3,000 megawatts of private-sector power generating capacity, making it the biggest power supplier in the country.
Yet the company that makes San Miguel Beer, one of the few internationally known brands from the Philippines, is setting the stage for even bigger ventures. Mr Ang tells the Financial Times that San Miguel and its shareholders want to build a cash pile of up to $13.5bn from share sales and fresh debt to finance bids this year for major infrastructure projects.
The nine-month-old administration of president Benigno Aquino III is seeking private-sector partners to build toll roads, airports and urban rail systems on behalf of the cash-strapped government.
The company and its key shareholders are hoping to raise up to $4.5bn from the sale of about one billion new and existing common shares – about half of its outstanding stock – in what could be the country’s biggest shares offering.
San Miguel has named Credit Suisse and Standard Chartered as joint lead underwriters for the offering that it wants to launch as early as next month. The company may also borrow another $9bn in bonds or loans, using the fresh equity capital as leverage, says Mr Ang.
The plans show the scale of San Miguel’s ambition, as the amount of new debt and equity money the company is looking to raise is equivalent to the government’s cumulative infrastructure budget for the past three years.
San Miguel hopes to sell the shares for more than 200 pesos each, or 17.5 per cent above Wednesday’s close of 179.60 pesos. The target price is based on the company’s assessment of future cash flows, reflecting the view that the diversification drive is already a big success.
Mr Ang says San Miguel’s enterprise value less debt this year stands at around $12bn, following the consolidation into the group of the power and petrol refining businesses, compared to a market capitalisation of just $4bn three years ago. Return on equity has more than doubled to 15 per cent from 7 per cent, he adds.
This year, the company expects its power and petrol businesses to account for almost 60 per cent of consolidated revenue, versus just 18 per cent in 2010, boosting overall group revenue by 123 per cent to 520bn pesos. Earnings before interest, taxes and depreciation and amortisation are also projected to rise 83 per cent to 84bn pesos this year, building on last year’s 53 per cent increase.
Investors seem to like what they’re seeing. San Miguel’s share price more than doubled from under 70 pesos in mid-September to a peak of 189.5 pesos in early January though it has since dropped back. The stock “has room to go up further if investors are convinced San Miguel can create more value from its acquisitions,” says Den Somera, a veteran trader and investor.
That is the challenge facing San Miguel. And as one professor of strategic planning puts it: “It’s relatively easy to make money from an operating asset. The real challenge is when they get into infrastructures and build from the ground up.”
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