Where the money is
SAN Miguel Corp. paid Goldman Sachs millions to identify growth opportunities, initially on power.That is how serious SMC is in its diversification effort. The money paid Goldman is well spent. The investment bank is probably the world’s best strategic planner today.
A consortium led by tycoons Ramon S. Ang, Henry Sy Jr. of SM and Joselito “Butch” Campos of Del Monte gained the upper hand in the auction of the state power transmission TransCo. following the failure of bidding in four tries.
In the last attempt, only three bidders were left for the right to operate TransCo for 25 years—Ramon Ang’s San Miguel group with Tenaga, operator of Malaysia’s National Grid, as its technical partner; the group of Enrique Razon of International Container Terminal Services, Inc. (ICTSI) with the Satte Grid Corp. of China as technical partner, and the group of Ricky Delgado who has an Italian partner.
TransCo could cost from $2.6 billion to $4.5 billion but the cash required of the winning bidder could be just 10 percent of that.
TransCo is a hugely profitable enterprise, being a monopoly.
In 2006 it had an operating income of P16.2 billion ($345 million), a return on gross utility revenue of P24.29 billion. In 2004 its return on sales was also a hefty 62.2 percent.
Properly managed, TransCo could yield its operator between $500 million and $800 million in annual free cash or EBITDA.
Not everybody with money can buy TransCo. A bidder must be 60 percent Filipino. It must have $300 million of net worth. It must have a foreign technical partner whose transmission experience includes 50,000 miles of power lines.
There are three major reasons why San Miguel is keen to diversify: one, thinning margins on beer; two, shrinking beer demand; and three, the market shift to brandy, as Filipino taste moved upscale.
Thus, SMC will go into power, mining, infrastructure, utilities, and property development. These businesses are extremely more profitable than brewing and selling beer.
In 2006, SMC posted return on sales of four percent—P10.17 billion net income on record revenues of P249.65 billion. The P249 billion made San Miguel the country’s largest company in sales but the P10.17 billion made it one of the well, modestly profitable. So it is not a question of just generating revenues. It is more a game of generating profits.
Based on average equity of P145 billion, SMC’s P10.17 billion represents a return on equity of seven percent—below the bank-lending rate of about 10 percent.
TransCo claims a return on equity of 10.89 percent in 2005 and 12.42 in 2004 but analysts believe ROE could be as high as 20 percent, given the right focus and the right management.
Luzon’s biggest power producer, Mirant, makes easily P10 billion from its two power plants, Sual and Pagbilao. Those plants were bought this year by Tokyo Electric and Marubeni. Their Team Energy paid $4 billion for the plants and will spend another $350 million to expand capacity. It takes three years to put a power plant on stream.
In her SONA July 23, President Arroyo admitted to a power shortage in Luzon and Mindanao over the next two years, by 150 megawatts and 210 megawatts, respectively. Visayas is even now suffering from occasional brownouts. Overall, the country needs probably as much as 3,400 megawatts of additional power capacity. It costs $1 million to install a megawatt.
In 2006 the Lopezes’ First Gen Corp. made 14 percent return on sales from power generation; their Meralco electricity retailer made 6.58 percent but its profits are understated. Meralco’s share price rose seven-fold in the last year, to P116 a share, reflecting higher demand for power and electricity shortages, with the booming economy. Meralco buys electricity from another Lopez company, First Gen, at a price twice that it pays Napocor.
The power business is extremely good. The economy has been growing by about five percent in the last six years releasing pent-up demand for energy that present supply cannot meet.
In water, the value of the Ayala family’s investment in Manila Water rose from P2 billion in 2001 to P22 billion in 2006, ten times in just five years. It’s not brilliance but high pricing. Manila Water got a 50 percent rate hike per year for five years. Any business that gets a 50 percent yearly price increase cannot lose money.
Property is another megabucks producer. In 2006 Henry Sy’s SM Development Corp. generated a whopping 69 percent return on sales—P984-billion profits out of revenues of P1.43 billion.
In mining in 2006, Philex Mining chalked up a 30.6 percent return on sales. Coal producer Semirara Mining reported 12.1 percent. There is a worldwide shortage of minerals and China, the world’s fastest-growing economy, wants to buy everything it can lay its hands on.
