24 Jan 2002

Big trouble brewing

A battle over the sale of a San Miguel stake is shaping up as another thriller in Manila, reports Eric Ellis

IN the salons of Manila, hardened Filipinos reckon there are only two things about their troubled country that are world class: corruption and their much loved San Miguel beer.
Over the past 16 years control of one of corporate Asia's mightiest enterprises has changed hands as frequently as the Philippines has changed governments. But the battle for San Miguel Corp may be reaching its endgame.
Next month the fate of one of the beverage industry's most valuable prizes will be decided at what promises to be a cranky meeting of San Miguel shareholders.
They will debate whether to allow a cheeky sale of 15 per cent of the $US4 billion ($7.8 billion) brewer to Japanese giant Kirin, a deal arranged by San Miguel chairman and billionaire Eduardo Cojuangco, the Philippines' richest man.
Cojuangco has made a sweet deal for the Japanese. Bedding down a strategic and cheap stake in San Miguel would add control of big boozy markets in the Philippines and Hong Kong to Kirin's half-stake in Australasia's Lion Nathan, while complementing Kirin's huge domestic base. And Kirin would outflank companies such as Belgium's Interbrew and the Netherlands' Heineken.
But the deal is a provocation to Philippine president Gloria Macapagal Arroyo, who took power in a people's revolution a year ago on a charter to clean up the Philippines' corruption.
That includes sorting out the San Miguel imbroglio, which has been fought over since 1986 when Cojuangco's 47 per cent grip on the company was seized by Corazon Aquino's anti-Marcos government.
Indeed, control of San Miguel passed with the first decree of Aquino's administration. That was the one that created the Presidential Commission on Good Government (PCGG), which quickly became the Philippines' biggest conglomerate as it collected assets linked to the ousted Marcos kleptocracy.
Marcos handed Cojuangco control of the lucrative Philippine coconut cartel and he used the levies of the coconut farmers to great effect, buying 27 per cent of San Miguel.
It was a strategic coup, with Marcos wresting control of the Philippines' biggest company away from its founders, the anti-Marcos Soriano family, whose Spanish descendants founded San Miguel 120 years ago.
Another crucial 20 per cent was purportedly held by former first lady Imelda Marcos. But as the mob descended on Malacanang Palace as the Marcos regime collapsed in 1986 she was in no position to exercise the asset, fleeing with her husband to wealthy exile in Hawaii.
Cojuangco, a prominent figure on Sydney racetracks, seized that 20 per cent, largely on the principle that claiming possession of the stock was nine-tenths of the law in those heady revolutionary days.
The PCGG counter-claimed that shoes weren't the only things found in the palace as the Marcoses baled out; so were share certificates for the 20 per cent San Miguel stake. Since then, Conjuangco and the Government have faced off many times in Manila's pliable courts over San Miguel.
While presidents Aquino and Ramos ran the palace, as they did for most of the 1990s, Cojuangco was kept away from the company. Management reverted to the Sorianos and they took San Miguel on a disastrous international expansion, including a big, ill-fated deal with Australia's Amatil group, getting caught long on US dollar loans when the peso collapsed during the 1997-98 Asian economic meltdown. Suddenly, this great Asian brand name was in a financial crisis as debts ballooned to $2 billion.
Cojuangco bided his time, circling the company and pouncing when his buddy Joseph Estrada won the presidency and control of the PCGG in 1998. A favourable court ruling on who could vote the PCGG's sequestered shares saw Conjuangco back in the chair.
Since then, even Cojuangco's critics say he's done a good job resurrecting San Miguel's fortunes and the Sorianos' disastrous offshore plays have been largely wound back. The group is on target to turn a $US250 million profit this year and that debt has been converted into a $US2 billion war chest. The woefully underperforming shares have started to move up.
"The sequestration itself and the long delay of the cases have somehow affected the realisation of the true value of the shares in the market," says Cojuangco.
"Many investment experts still agree that SMC's strong profit performance is heavily discounted by the legal overhang on the shares."
But analysts agree that governance has been an issue at San Miguel on Cojuangco's watch. Now Cojuangco wants to sell and Kirin is a willing buyer. The deal sees the creation of 15 per cent of new shares for Kirin, which would dilute the Government's shareholding.
It's a test for the Arroyo Government. It swept to power promising to cleanse the Philippines and recently appointed hard-headed lawyer Haydee Yorac to the PCGG, giving it more legal muscle to hunt down the $US20 billion in Marcos assets, including the disputed San Miguel shares.
Still, a $US540 million foreign investment in a country as desperate as the Philippines is not to be sneezed at. It's the biggest vote of confidence in Manila in a decade.
Anton Periquet, of Deutsche Bank associate Regis Securities, says Arroyo has a dilemma. "She can fight Cojuangco in the courts, which will make an already murky situation even murkier, or she can give in and allow the Kirin deal."
Cojuangco seems to hold the whip hand. If Arroyo fights, she stands accused by him of sending the wrong signals to foreign investors about the Philippines' willingness to do business. But if she accepts it, her credibility suffers.
Yorac has an alternative. She wants to offer foreign brewers the disputed 47 per cent plus another 20 per cent owned by government pension funds. But that could open up another round of legal dramas and the Cojuangco machine is better resourced than the Government. Arroyo has indicated she will allow the deal in return for more government board seats.
Presidential spokesman Rigoberto Tiglao says: "What's being discussed now is how to give full play to the government equity in San Miguel." He says Cojuangco believes that having government representatives sit in crucial committees "would even be helpful to the company".
It's all working towards a classic Philippine solution ahead of the February 27 shareholders meeting called to debate the Kirin deal.