``An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”-Benjamin Graham
We recently read with interest how San Miguel has been scaling down on its Beer business model and has been phasing into the energy sector gradually.
Note: Our comments here are not intended for any recommendation but serves as to analyze on the possible opportunity costs of the shifting corporate strategy of the second largest publicly listed company (technistock.net) of the Philippines.
Although we are not clear about the details of the proposed changes in the structure of ownership of San Miguel, Japan’s Kirin Holdings which has reportedly acquired a cumulative 19.7% stake in the company in 2001 and 2005, is reportedly in talks to acquire a majority share.
According to Finance Asia, ``Japan’s Kirin Holdings and San Miguel Corporation yesterday announced that they have signed a memorandum of understanding which includes an exclusivity clause for Kirin to acquire a further 43.25% stake in San Miguel Brewery. No financial details were disclosed, but based on San Miguel Brewery’s last traded share price, the stake is estimated to be valued upwards of $1.25 billion.”
Yet, recently San Miguel [SMC: SMCB] acquired the 27% stake of the Philippine Government Service Insurance System (GSIS) in Meralco (abs-cbnnews.com) and a 50.1% stake in Petron from a London-incorporated investment fund Ashmore Investment Management Ltd while dabbling on the idea to enter the telecoms industry with Qatar Telecom (gmanews.tv).
Thus, San Miguel’s business model is being overhauled over a very short period of time.
The Risk Variables
From our point of view, the shift in San Miguel’s corporate strategy comes with the following risk variables:
1. Competency risk. As the company veers away from its métier, it will incur a learning curve. While the company may “acquire” experience to reduce the costly interfacing of such learning curve, the drastic changes in the business path could entail some challenges in the operational, management and or corporate culture by way of frictions.
2. Country concentration risk. San Miguel which used to diversify its business internationally seems to be putting all of its eggs into one basket-banking on the Filipino consumers.
3. Restrained Profits. The consumer based energy industry is a heavily regulated industry with attendant regulatory profit caps. Meanwhile growth prospects are likely to follow the growth conditions of the local economy’s growth.
4. Political Risks. Extreme price changes in consumer energy could lead to highly volatile social mood swings. In times of political extremities, where governments can turn “outside-in”, the risk of nationalization could play a significant ‘sword of Damocles’ over the company’s new business model.
5. Late Mover Disadvantage. The telecom industry is a highly competitive capital intensive environment. Trying to gain market share from the existing players at time where the mobile user’s penetration level is at 60% seems quite challenging. It would be better for the company to acquire one of the existing players or adopt a ‘pail and shovel’ approach by introducing technology related which could cater to the industry.
The Opportunity Cost
San Miguel’s decisions will also mean lost opportunities. And this will include the loss of capitalizing on:
1. Asian consumption growth.
While today’s financial crisis is expected to hurt consumer spending everywhere, it is simply part of the business cycle which ultimately will segue into a recovery.
From our point of view, today’s crisis should be used as an opportunity to position for such cyclical transitions and eventually reap on the rewards of the prospective dynamism of the fast growing region.
According to the Economist in 2007, ``CHINA has the world's biggest thirst for beer, comfortably outstripping the country in second place, America. But the Chinese market is highly fragmented. Around half of all the suds sold in America is produced by Anheuser-Busch, brewer of Budweiser. Snow, China's most popular cold one, commands only around 5% of that country's market.”
Figure 4: Economist: Top TEN Beer MarketsIn short, a fragmented market in a rapidly growing economy like China can translate to enormous potentials to secure added market share and expand profits.
2. Currency regional currency gains. Exposure overseas extrapolates to revenues in localized terms. With our expectations of Asian currencies to appreciate over a longer horizon, the potentials of such currencies gains could compliment profits will be missed.
3. Exploit Other Global Opportunities. San Miguel could have used the present opportunities to expand into consumer related industries parallel to their field.
The Boston Global Group in their 2008 New Global Challengers identifies the possible success dynamics for companies in Rapidly Developing Economies (RDE) over the coming years, see figure 5.
According to BCG, ``Our analysis of the 2008 BCG global challengers reveals globalization dynamics that are already affecting every market and industry, reshaping the world’s economic landscape.”
The BCG candidates for the world’s fastest growing companies come from mostly the BRIC (Brazil, India, Russia and China) zone. While our neighbors have some representative Indonesia (1), Malaysia (2) and Thailand (2), the Philippines have none.
The 6 BCG models quoted from Atlantic community
``1. Taking RDE Brands Global: Having established their brand identity in their home markets, companies attempt to take their brand global. Usually their expansionary growth is entirely organic, as witnessed at India’s Bajaj Auto or Brazil’s Nature cosmetics.
2. Turning RDE Engineering into Global Innovation: Low labor costs and strong R&D performances offer RDE companies global competitive advantages, as with Brazil’s Embraer, the world’s third biggest aviation company.
3. Assuming Global Category Leadership: Faith in their own product’s strength drives some of the challengers to an attempt to assume a leading role in their line of business. China’s battery producing BYD has successfully realized such a strategy.
4. Monetizing Natural Resources: Spurred by soaring commodity prices, the challengers can increasingly use mergers and acquisitions (M&A) to expand globally and to secure viable growth. An example would be India-based Hidalco’s recent purchase of Canada’s Novelis.
5. Rolling Out New Business Models to Multiple Markets Companies such as the Mexican mobile-network operator America Movil adapt their branding and marketing strategies to different regions, while retaining their basic business model. This has allowed them to expand their business into new markets while localizing operations in each.
6. Acquiring Natural Resources Assisted by their government, some challengers — especially Chinese ones — focus on securing their access to resources to ensure long term growth.”
Basically, San Miguel’s main opportunity cost is the cost of globalizing its business model.
There could be two possible angles from which we suspect could have shaped these strategy shifts:
One, the San Miguel management believes that recent globalization trends might be reversed over the long term and thus has positioned defensively by going domestic or
Second, the company’s chairman Eduardo Cojuangco Jr., who is founder of the National People’s Coalition and has ran against Fidel V Ramos for the 1992 presidency but lost, could possibly have politically associated strings to these acquisitions with the 2010 elections only a year away.
