The perils of being San Miguel

Tony Lopez

Tony Lopez

When short-sellers and speculators dumped shares of giant diversified conglomerate San Miguel Corp. in an apparent attempt to bring down its value last week, President Ramon S. Ang ordered his brokers to buy out all sellers and buy back the company’s shares. Up to P1.1 billion was lined up to buy out the speculators.

Accordingly, pro-San Miguel brokers scooped up shares as share price went from P89.90 on July 12 (Friday), to as low as P76.40 a share on July 17, Wednesday, down 15 percent and a 52-week low.

Some P500 million was budgeted for the first-day buying spree, and another P600 million on the second day. However, SMC’s share prices recovered dramatically on the second day, July 18, closing at P87.33, up 14.3 percent from the July 17’s low of P76.40, after the short-sellers noticed the futility of their gambit.

The result: San Miguel believers ended up substantial gainers and shaming the short-sellers and speculators. Ang had announced a buy-back of all company shares being dumped.

It is easy, after all, to provide support to SMC’s stock price and for that matter, jack it up—if its owners want to. After all, there are very few publicly owned shares (14.3 percent) and none among the company’s gilded shareholders are willing to sell—among them, President Ang himself who owns easily 15.5 percent, Top Frontier Investments (66 percent) represented by Iñigo Zobel and Joselito Campos, and of course, Chairman Eduardo “Danding” Cojuangco Jr.

After the operation, SMC Chief Financial Officer Ferdinand K. Constantino issued a thinly veiled warning that the company would go after those who attempt to bring down shareholder values.

The blame easily went to the International Monetary Fund, which issued a report in April this year, the Article IV of which talked about a conglomerate that could default on its loans. The item became the subject of a belated Manila Times column by my colleague Bobi Tiglao on July 14, a Sunday. IMF is headed in Manila by Shanaka J. Peiris, who has been around for 10 months. He clarified to me San Miguel was not singled out.

San Miguel’s business rivals also naturally want the conglomerate to falter. In just five years. SMC grew from $3.4 billion in sales to $16 billion in 2012, becoming during the short period a dominant or substantial force in such new businesses as petroleum refining and marketing (Petron), electricity distribution (Meralco), power generation (SMC Global Power), airlines (PAL and AirPhil), mining, airports and infrastructure (it is on track to own 80 percent of the major tollways in Luzon).

Ang is targeting revenues of $50 billion in years, a goal he assures is achievable as SMC expands overseas. It wants to buy an oil field.

The conglomerate is also on the lookout for major acquisitions in the region. It bought the refining and retailing business of Exxon-Mobil in Malaysia for less than $1 billion and bought half of a new low-cost airline in Cambodia.

Many of SMC’s daring acquisitions were marked by swiftness and secrecy, leaving rivals as well as investors dazed and envious.

Multinationals, the only ones that could pose formidable challenge to San Miguel, are also wary. Hence, when what seems like bad news hits San Miguel, the wolves come out in the open.

In 2009, for instance, SMC bought 32.8 percent of Meralco for just P90 a share, three years to pay. Today, the holdings are worth $3 billion, a gain of $2 billion after three years with Meralco doing at P300 a share.

Where does San Miguel get the money for all those acquisitions? Three sources: internal funds, borrowings and bonds and profits from buying and selling the same acquisitions. SMC is too big a conglomerate to be financed by a single bank.

SMC President Ang assures investors that the company remained on solid footing.

Separate statements from the Bangko Sentral ng Pilipinas (BSP) and the International Monetary Fund (IMF) helped push SMC share price to P85 at the close of trading on July 17.

In a statement sent to the Philippine Stock Exchange, Ang affirmed “his optimistic outlook on the company’s prospects for further growth, considering the company’s strong revenues and consistent profitability that underpin its robust balance sheet.”

Bankers were not amused at the IMF incident. “San Miguel is too big and too diversified as to default,” says Lorenzo Tan, president of RCBC. Indeed, says BDO Unibank President Nestor Tan, “nearly all the conglomerates are widely diversified.”

Thus, failure in one segment of the business, if any, can easily be absorbed by the other businesses.

Indeed, San Miguel debts, due in 2014 and 2015, had just been rolled over into a new loan payable in 10 years and at lower interest rates.

On Friday, July 19, SMC sold 64.33 million shares equivalent to about 5.7 percent of Meralco at P270 per share or P17.369 billion. The net gain from the sale, P10 billion, will help fund San Miguel’s expansion and diversification. The same day, SMC subsidiary San Miguel Global Power broke ground on a new 600-megawatt power plant in Davao in Mindanao where rolling blackouts were crippling the economy.

SMC, the country’s largest company in terms of revenues and one of the most profitable, remains on track for further growth given its strong revenues and consistent profitability.

The company posted record revenues in 2012 of P699 billion, 30 percent higher than in 2011. Net income was up 57 percent to P27.6 billion.

For the first quarter of 2013, revenues rose 25 percent to P178.3 billion, up 25 percent.

Operating income amounted to P15.4 billion, up 7 percent. Net income was down 34 percent to P7.59 billion because of lower equity earnings, higher interest expense and the higher foreign exchange gains in 2012.

“As of the first quarter of this year, SMC’s consolidated cash and cash equivalent stood at P152.3B while its gearing ratio, at 3.1x net debt to EBITDA, is lower than the 5.5x stipulated in its loan covenants,” President Ang points out.

Simply stated, SMC can borrow up to P429 billion. But it has borrowed only P239 billion, 56 percent of the ceiling. So how could the conglomerate be overextended and at risk of default?

“We would like to clarify that the conglomerate, which was the subject of the news article that referred to an IMF report dated April as the source, was not SMC,” Ang says. “It is unfortunate that certain people have taken advantage of that information to fabricate and spread malicious stories and sow panic in the market to the detriment of our shareholders and the investing public, in general.”

Ang points out that insofar as the IMF report is concerned, attention should be given to the following:

1. No specific conglomerate was mentioned in the report.

2. The report does not even remotely suggest that a specific conglomerate is on the verge of default, in fact, the report categorically stated that the “likelihood of a default happening is low.”

3. The report was written as part of the regular Article IV consultations with sovereign members. IMF came out with such to outline possible scenarios and appropriate sovereign responses.

Bangko Sentral Governor Amando M. Tetangco described the IMF warning as generic, and was not targeted at any specific company.

He also gave assurance that loan defaults by big companies could be absorbed by the local banking system and would not lead to a credit crunch.


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  1. So it’s sucking time with San Miguel after Tiglao fired a wrong shot. huh?

    ManilaTimes’ writers are worse than finance bloggers nowadays.

  2. Dominic Albert on

    SMC is burden with debt because of too much acquisitions while Danding Cojuangco is losing money because of the recent loss on UCPB case and cannot infuse additional capital to SMC. Furthermore, SMC was forced to sell MERALCO shares in order to help the stocks from attacks since investors is losing confidence in the company.