The kneecap specialists

At the Cardinal Santos Medical Center, there is a Filipino orthopedic surgeon who can compare with America’s best in the field of kneecap replacement surgery. He is Dr. Eddie Wang, a young medical practitioner who has specialized in the field of kneecap surgery. And Dr. Wang is the fellow who can handle, with utmost efficiency, care and competence deposed President Estrada’s kneecap problem. What this means is that there is no need for deposed president Erap Estrada to go to the US for his kneecap replacement. Dr. Wang, as well as other Pinoy orthopedic surgeons like Dr. Antonio Rivera, can do the job in the most excellent manner possible.

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Let the issue of Erap’s trip to the US come to an end. He is needed here in the Philippines, not in America, to answer the plunder charges filed against him before the Sandiganbayan. And media can use the space and time previously used to hype up Erap’s kneecap problem to project the more pressing, substantive issues affecting the Philippines.

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With almost all the smoke and dust having settled over Kirin Brewery’s buy-in into San Miguel, the next question on everybody’s mind is: What does the company do with all that cash? For those who do not know, Kirin is a Japanese beer company that agreed to acquire about 15 percent of SMC for some US$540 million. Although the Macapagal-Arroyo administration initially cast a wary eye at the deal, it became evident to all concerned that an investment of this magnitude should not be subjected to politics.

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With the Kirin investment, San Miguel will have more than $1 billion in cold cash, says the investment bank UBS Warburg in its Global Equity Research report. With beer sales struggling under high taxes and a stagnant local market, look for San Miguel to use that money to buy new businesses that would improve its return to shareholders. Even now, San Miguel beer is in almost every corner of this archipelago.

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The room for domestic growth in SMC’s beer market, while still there, will eventually be limited. As UBS Warburg stated in its report, San Miguel learned a lot from its mistakes when it tried to push beer sales aggressively in 1999 and 2000 by flooding the market with inventory and offering dealers with generous credit terms. However, for one reason or the other, sales did not pick up as expected. Thus, says UBS, apparently "SMC has learned to preserve precious working capital and now considers these businesses as cash cows rather than growth businesses."

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The way for San Miguel to grow is to buy companies that complement its existing businesses, and which have higher returns. That’s what UBS Warburg thinks San Miguel and its chairman, Eduardo Cojuangco, will focus on, with the consummation of the Kirin deal. In the last two years, San Miguel reacquired control of the local Coca-Cola bottler, consolidated its market share in the processed meat business by purchasing Purefoods from the Ayala group, and strengthened its position further in the soft drink market with the acquisition of Cosmos from the Concepcions.  This is the way the company will probably go – finding businesses that make profits, but still have a substantial connection with the company as a food and beverage business.

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And what does UBS Warburg think of San Miguel stocks? It says that "with regional peers offering potentially better returns SMC, we expect the company to seek opportunistic investments in the region." Simply put, San Miguel will most likely buy some other businesses with its cash hoard because the rate of return from abroad is better than what it can get here.

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In addition, SBC Warburg rates SMC stock as a buy because "the market has not yet recognized SMC’s efforts at improving shareholder returns via its recent domestic acquisitions." Undoubtedly, the purchase of these new businesses such as Cosmos and Purefoods, which are related to other business lines of San Miguel, will provide benefits once the operations and management of these new firms are integrated with San Miguel. It may take the form of better prices for their products, more economies of scale – but there will be some benefits.

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For most of its history, beer has been the primary business that has been driving San Miguel forward. The Filipino’s attachment to this brand is legendary, and one cannot but feel a tinge of pride whenever one comes upon a San Miguel product being sold in a foreign land – whether at a grocery store or restaurant. But even the Filipino’s love affair for this product has a limit – normally subject to how much one can responsibly imbibe or the cash available in the pocket.

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This, in a nutshell, is the gist of a report released by the investment bank UBS Warburg. Having recognized the limitations in the domestic beer market, SMC’s additional resources will now be focused on creating new opportunities to provide its shareholders with better returns. Many of these will remain related to its core businesses. As UBS Warburg stated in its report, "the company’s strategy has been to buy out companies from which it believes it can derive synergies."

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Amidst the economic problems facing our country, SMC provides a glimmer of light during a murky period where business confidence remains guarded. It has attracted the largest foreign investment of this administration from a major Japanese company. With its acquisitions, it is creating value for shareholders and improving the potential for future growth. It seems that San Miguel has re-attained its status as one of the country’s better-managed and more focused companies. Politics should have no part in these kinds of stories, and congratulations to President Gloria Macapagal Arroyo for keeping politics out of the San Miguel affairs.

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Thoughts For Today:

A person who has lived well
never fails to look for the best in others,
gives the best of himself
and leaves the world a better man he found it.

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It’s not how well you jump over obstacles,
nor how fast you get to the top,
but how often you stop to help people
that makes life worthwhile.

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My e-mail addresses: [email protected] and [email protected]