San Miguel set to dominate Philippine soft drink market

Food and beverage conglomerate San Miguel Corp. is on the verge of ensuring a virtual monopoly in the Philippine soft drink industry, estimated to be worth PHP 50 billion ($1=PHP53.333) a year.
This …

Food and beverage conglomerate San Miguel Corp. is on the verge of ensuring a virtual monopoly in the Philippine soft drink industry, estimated to be worth PHP 50 billion ($1=PHP53.333) a year. This after RFM Corp. said on 18 July that it has agreed in-principle to sell its 83.5% stake in Cosmos Bottling Corp. to San Miguel. Cosmos controls 20% to 25% of the local market, while San Miguel, through its unit, Coca-Cola Bottlers Philippines Inc., has a 70% share of the market. But while the stock market has cheered San Miguel for its impending triumph, analysts tracking the food and beverage group are still holding back their applause. Thursday, San Miguel“s widely traded B shares closed at PHP52.50, up 50 centavos, or 1%, but off their intraday high of PHP53. The A shares, which are exclusive to Filipinos, finished 2.4% higher at PHP43.50. They, too, ended off their day high of PHP44. “With no definitive details yet on the deal, we retain our hold rating on the counter,” comments G.K. Goh Securities on news of San Miguel“s preliminary agreement for Cosmos. RFM said details of the impending deal are still being drawn up and will be contained in a memorandum of agreement that will be signed with San Miguel possibly next week. In a separate disclosure, San Miguel confirmed the agreement in-principle, but added: “No agreements have been reached on the price, structure or other details.” Sources close to the deal said San Miguel offered PHP14.5 billion to acquire RFM“s shareholdings in Cosmos. They added the amount included a PHP2.5 billion goodwill payment for RFM to stay out of the soft drink business for an unspecified period and PHP1 billion to settle some of Cosmos“ debts. “For those against the deal,” said an analyst with a foreign brokerage house, “the main issue is pricing. They believe San Miguel is paying a very high price for Cosmos.” “And if you look at the deal, it is actually neutral for San Miguel,” the analyst adds. Even without Cosmos, San Miguel unit Coca-Cola Philippines already dominates the soft drink market. With an aggressive marketing push and the introduction of cheap brands to directly compete with Cosmos“ low-priced products, analysts believe Coca-Cola Philippines could get an even larger share of the market. “It“s not the brand, but an issue of price,” said Minda Olonan, analyst at Nomura Securities, explaining the success of Cosmos in expanding its market share from only 8.4% in 1994. Even so, some analysts view San Miguel“s move as a quicker way to gaining market share and preventing the possible alliance of its rivals. The other suitor of Cosmos is the local operation of US beverage giant PepsiCo Inc. Some in the market believe the cost to San Miguel of the transaction may not be as high as published report had put it. Drawing parallels with an earlier transaction when Coca-Cola Philippines agreed to acquire the juice and water brands of San Miguel“s unit, La Tondena Distillers Inc., some analysts said Coca-Cola Co. of the US may actually be shouldering the cost of acquiring the Cosmos brands, which some estimate may be worth half of the transaction value. San Miguel owns 65% of Coca-Cola Philippines, while the rest is owned by Coca-Cola Co. Cosmos“ total assets are worth PHP7.8 billion. “If San Miguel is only paying for the assets and not the brands, as it would in the La Tondena deal,” said an analyst with a foreign brokerage house, “then the cost to San Miguel of the Cosmos purchase may only be PHP 4 billion.”