How First Pac will finance Del Monte Pacific deal

The Hong Kong-listed firm is back on the acquisition trail and back in favour.

In what could amount to a $410 million acquisition, First Pacific has announced its intention to buy Del Monte Pacific. In the first phase of its acquisition it has agreed to buy 40% of the company from Cirio, an Italian food company that is now under receivership.

The 40% stake will cost $164 million - a 20% premium to Singapore-listed Del Monte Pacific's stock price. However, at an estimated 9.9 times 2005 EBITDA, the deal is considered fairly priced, and has been well received by analysts.

Del Monte Pacific's business activity is focused primarily on the Philippines, with 70% of its revenues coming from processed foods (ketchups, tinned pineapples, sauces), 25% from beverages and remainder from fresh pineapples and cattle feed. In the processed foods area, it commands a 61% market share in the Philippines - where it owns the right to use the Del Monte brand. It also owns the rights to produce and distribute under the Del Monte brand in India.

Del Monte Pacific operates a low cost production business model, integrating plantations, canneries and ports, and is a major player in pineapple production. Currently, 61% of its sales are in Asia and the remainder in the US and Europe. One of its attractions is its relative stability - it made $30 million of profit in 2003 and $28 million in 2004.

First Pacific is acquiring the business in an LBO, which it will look to fund two thirds with debt and the remainder from its own cash reserves. JPMorgan is its advisor and will put in place the necessary bridge funding, which will then be taken out with a high yield bond next spring.

For First Pac the deal makes strategic sense. The sector is familiar to the firm via its ownership of top Indonesian food company, Indofood. And the country of operation, the Philippines, likewise fits wells with its portfolio, which includes PLDT. It hardly needs saying that First Pac's CEO, Manny Pangilinan is a Filipino.

As of June 30, First Pac had $257.7 million of cash, having launched a $199 million zero coupon exchangeable in January. Deutsche Bank estimates that First Pac will receive $66 million in dividends from PLDT this year - making this the first year it has received dividends from the Philippine telco since it acquired 25% after the crisis.

It also has a 51% stake in Indofood, which has historically paid dividends of around $12 million per year. First Pac is forecasting a $138 million profit for the year, and has seen its stock price surge to HK$2.92.

This marks a major turnaround for the Salim-controlled company, which two and a half years ago was facing a liquidity crunch - owing ING $100 million - and saw its controlling shareholder (Anthoni Salim) fall out with Pangilinan over the sale of a stake in PLDT to John Gokongwei. At its lowest ebb, the stock traded as low as HK$0.69 - having traded as high as HK$7 in 1999. Two senior First Pac executives (Michael Healy and Ron Brown) left the company as a result of the cancellation of the PLDT deal with Gokongwei.

However, Pangilinan has been vindicated by subsequent events. Those naysayers - which included FinanceAsia - have been forced to eat humble pie, since everything he said has turned out to be correct.

His belief that the PLDT sale was ill-timed turned out to be accurate. Back in early 2003, PLDT's stock was trading at a mere Ps430 versus Ps1,835 today. His prediction that PLDT was on the verge of turning around and being revalued by the market was right.

And via the UBS exchangeable bond he was able to stave off the liquidity issues and buy some time. Now with PLDT paying ever larger dividends, First Pac is once again turning into a cash cow and looking to grow via acquisitions once again.

Playing ketchup

The complicating factor for the Del Monte deal is the fact that the Lorenzo family of the Philippines also own a 21% stake. It currently has management control, and has pre-emption rights that will allow the family to match First Pac's offer.

Previous bidders have been put off due to their fear the Lorenzo family will exercise their pre-emption rights. According to the sale and purchase agreement with Cirio, the Lorenzo family will have till mid-January to come up with a matching bid for the 40% stake First Pac is offering to buy and according to Singapore listing rules, will then have to make a general offer. Whether the family will be able to finance this, and whether all family members will endorse such a move, is the current source of speculation.

Should the Lorenzo family fail to bid, First Pac will make a mandatory general offer in February, which should last 60 days. Depending on how big a chunk of the company gets tendered, First Pacific will look to launch a high yield bond in April or May.

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