SINGAPORE, Dec. 19 (UPI) -- Kirin Brewery Co.'s acquisition of a minority stake in San Miguel would bring Asia's largest brewer on a par with America's Miller Brewing Co., as the world's sixth-largest brewing group by sales, but the acquisition is far from being a done deal.
Although it has the blessing from the board of the Philippines' largest beverage and food group, other voices are rising, which indicated some brewing difficulties.
Under the proposed deal, Kirin would invest $536 million (68 billion yen) by subscribing to a new issue of 442.56 million common class B shares at a price of 63 peso each. This would give the Japanese brewer a 15 percent stake in the expanded capital of San Miguel.
San Miguel has announced its intention to increase its authorized capital stock, the amount of stock it is allowed to issue, to pave the way for the deal. A special meeting will be held on Feb. 27 to ask shareholders to approve the increase and relinquish their pre-emptive rights to the new shares.
In a disclosure to the Philippines stock exchange released Wednesday, the company indicated that the capital increase will raise the number of its more widely traded B shares to 1.35 billion from 900 million. B shares are open to Filipino and foreign investors, while A shares are exclusive to Filipino investors.
But the problems facing the deal are multiple.
On one hand, and most importantly, the 15-year ownership issue of San Miguel is still being resolved by the courts (the government is claiming ownership for 47 percent). On the other hand, the Philippines Stock Exchange has indicated the proposed sale may be subject to a ruling that would require San Miguel to first offer the new B shares to existing shareholders or public investors before they are privately placed with Kirin.
In 1986, the Presidential Commission on Good Government, the government agency set up to recover alleged ill-gotten wealth acquired by the late president Ferdinand Marcos and his allies, put under trusteeship United Coconut Planters Bank, which in turn administers the Coconut Industry Investment Fund holding a key 27 percent stake in San Miguel. The disputed stake is the single largest share block in San Miguel and is equal to five of the 15 seats on the board.
Earlier this year, an anti-graft court gave back to Eduardo Cojuangco, San Miguel Chairman, the control of the voting right linked to the 47 percent dispute stake.
Then last Friday, the Supreme Court ruled the government could regain temporary control of UCBP (and with this the indirect stake in San Miguel), giving it the right to vote on the sequestered shares. It also gave an anti-graft court six months to finally determine whom the real owner of UCPB's shares.
Separately, the commission also has pending criminal and civil suits again Cojuangco, who owns a 20 percent block in San Miguel, making him the single largest shareholder. The government allegedly claims the stake was acquired using coconut levy funds intended for the development of the industry. Cojuangco, who affirms the funds came from private sources, has disputed this.
This is really a battle for the seats on the board. Two of the government's pension funds hold board seats in San Miguel through separate stake, and these seats along with those associated with the UCPB shares would give the government a majority with 43.9 percent. Under the new deal, Kirin would get two board seats.
Following the Supreme Court ruling, the government has send conflicting signals on his position toward the Kirin deal. On one hand President Gloria Arroyo-Macapagal has described the deal as a "shot in the arm" for the economy. This would be the largest foreign investment since the start of her administration.
But official from the commission have also indicated they believe San Miguel shares could be sold at a higher premium than that the Kirin deal if the government was selling his block. There are also some concerns that the issue of new capital will dilute the share of the government.
Arroyo has asked Finance Secretary Jose Isidro Camacho to come up with a "win-win" formula that would redound to the welfare of the country's coconut farmers on the entry of Kirin into San Miguel Corporation.
Arroyo noted that the commission was looking at the deal only from the legal point of view, but added "It is not just a matter of litigation, it's also a matter of a major investment. Even as we want to make sure that the farmers will benefit from any monetization of the coco levy fund, we also don't want to do away with a hundred million dollar investment."
Meanwhile, the stock exchange said it has the power to stop the listing of shares subscribed through private placements unless there is first a public rights offering.
In a statement to the exchange Wednesday, San Miguel argued it should be exempt from the ruling since it will be selling the shares at a premium, not a discount, to the current market price.
The price of the transaction represents a 13.5 percent premium over the Dec. 14 closing price of 'B' share and a 24.7 percent premium on the closing price of Dec. 13.
"We thus believe there is unlikely to be a significant demand for the shares from existing shareholders," San Miguel wrote in response to the stock exchange's statement.
Sector analysts said the transaction was not what the market had been expecting, as rumors had it the buy-in would consist primarily of treasury shares equivalent to a 9.7 percent stake. Unlike the issuance of new shares, selling the treasury shares is easier since this does not need any shareholder approval.
Face with a shrinking local market, Kirin believes the deal will enable it to create a global operation base, having a strong franchise in Asian-Pacific region, together with a joint venture in China and in Australia through Lion Nathan, in which it acquired a stake in 1998.
San Miguel has around 90 percent of beer market share in the Philippines and operates in various countries in Asia, such as China, Vietnam and Indonesia.
"San Miguel is also an integrated drink and food industry with soft drinks, spirits and wines and food as well. We will also seek synergetic cooperation in the same business field as Kirin group has," Kirin said in a statement.
Meanwhile, San Miguel is eyeing the Japanese brewer's network to allow it to penetrate more markets in the region. The company should also be in a position to grow via further acquisitions given the capital infusion by Kirin.
That said most sector analysts doubt both companies will be able to derive synergies and economies of scale.
"As with Lion Nathan in 1998, there will be little direct synergy for Kirin, but we consider it an attractive acquisition from a financial perspective, and it represents a strengthening of the overseas business at a time, when business expansion in Japan is becoming difficult," an analyst at a large US investment house noted.
Analysts do not expect the deal to immediately lead to expansion in Kirin's Chinese business or produce synergies through the joint purchase of raw materials, and other joint operations.
