Philippines: ECM deal upsurge meets EM stress

San Miguel Food & Beverage files record-breaking equity deal as the country’s leading families consider spinning off assets to raise equity capital for infrastructure projects.

One of the Philippines’ biggest conglomerates filed the country’s largest-ever prospective equity capital raising on Wednesday, praying the deal does not run headlong into a full-blown emerging markets crisis by the time it hits the market later this autumn.

Bankers say San Miguel Food & Beverage (SMFB) is hoping to raise $1 billion to $1.5 billion from a 1.02 billion secondary share offering. But it would be an understatement to say the timing is not ideal.

Over the course of August, the Philippines Stock Exchange PSEi Index resumed a downward slide which has made it one of Asia’s worst performing stock markets so far this year. As of Wednesday’s close, the index was down 10.82% year-to-date, second only to China’s benchmark stock indices.

The Philippines’ current account deficit makes it one of the Asian nations most vulnerable to the impact of rising US interest rates and Turkey’s escalating financial crisis, which is pressuring all emerging market assets.

Earlier this summer, there had been signs investors were starting to bargain hunt after the Philippines’ 2019 earnings multiple dropped below 15 times for the first time in a number of years. However, the mini-rebound, which began in late June, swiftly fizzled out in early August when America’s trade policies led to new stand-offs with Turkey and China.

As a result, SMFB has scaled back ambitions to boost its freefloat up to 30%. Instead, it has wisely opted to simply meet the 20% regulatory minimum and will issue secondary shares accounting for a 17.2% stake according to S&P Capital IQ figures.

The base deal comprises 887 million shares, with a greenshoe of 133.05 million shares. The scheduled close is November 6.

Domestic co-ordinators are BDO and BPI, with JP Morgan, Morgan Stanley and UBS as joint global co-ordinators. Deutsche Bank and Goldman Sachs complete the syndicate as joint bookrunners, with Standard Chartered acting as financial advisor.  

Theoretically, the deal could raise Ps81.6 billion ($1.53 billion) based on the stock’s Ps80 Wednesday close. This would surpass BDO Unibank’s record-breaking Ps60 billion rights issue in January 2017.

However, the overall market is sliding and then there is the issue of what discount investors will expect given the deal is effectively a re-IPO following the consolidation of San Miguel’s food and beverage assets under SMFB earlier this summer.

As one banker told FinanceAsia: “The equities market continues to be very challenging here in the Philippines. But there are some very interesting deals coming and they will reward investors that have patience.”

Indeed, the equities pipeline is, ironically, shaping up to be one of the healthiest in years. Bankers say a number of the country’s leading families have begun discussing, which assets to spin-off to raise funds to take advantage of the Philippines' ambitious $167 billion infrastructure programme: Build, Build, Build (B3).

In many ways, any issuance would be an improvement on recent years. So far this year, there has just been one solitary IPO according to Dealogic figures (see table 1); the Ps8.1 billion ($152 million) IPO of property group D. M. Wenceslao & Associates, which was completed in June.

Last year was not much better, with just four IPOs led by Eagle Cement’s Ps7.5 billion IPO.

But this could all change in 2019. Bankers predict it could be the best year ever, with one corporate finance head suggesting there could be a further two $1 billion plus IPOs in the offing if markets are conducive.

Philippines Stock Exchange IPO volume by year
Pricing Date by Year Deal Value ($m) No.
2010 738.96 3
2011 245.84 5
2012 780.90 5
2013 1,384.11 8
2014 316.29 5
2015 111.76 4
2016 1,015.25 4
2017 455.60 4
2018 155.19 1
SOURCE: Dealogic

METRO PACIFIC HOSPITALS

One of 2019’s leading IPO candidates is Metro Pacific Hospital Holdings (MPHH). Bankers say the group has reactivated its IPO plans and they are currently positioning themselves for formal syndicate roles.

During a previous iteration, a group of non-US banks held advisory roles for a deal that could raise over $500 million if it is able to achieve the same Ebitda multiples that Indonesian and Thai hospital groups currently trade at. In 2017, MPHH reported Ebitda of Ps4.9 billion ($92.24 million).

Officials have previously said they would like to issue 30% of the company’s equity capital. They envisaged a 15% divestment by Metro Pacific and 15% by the Government of Singapore Investment Corp, which currently owns 39.9%.

According to S&P Capital IQ data, GIC purchased a 14.4% stake for Ps3.7 billion in 2014, plus the right to increase it to 39.9% via a Ps6.5 billion exchangeable.

MPHH ranks as the Philippines’ largest private hospital operator with 14 hospitals and 3,300 beds at the end of 2017. It hopes to boost the number to 5,000 beds by 2022.

However, bankers say timing of the IPO will be dictated by the fate of the “Super Sevens” plan to re-develop Manila’s overloaded Ninoy Aquino International Airport (NAIA), since this is what Metro Pacific wants to raise funds for.

Group head, Manny Pangilinan, is one of seven tycoons who formed a consortium to pitch a Ps350 billion ($6.57 billion) re-development plan that was granted original proponent status in August. The other consortium members are: Andrew Tan’s Alliance Global; Lucio Tan’s Asia’s Emerging Dragon Corp; John Gokongwei Jr’s JG Summit; the Aboitiz family’s Aboitiz Infrastructure Capital; the Ayala’s AC Infrastructure Holdings and the Gotianun family’s Filinvest.

If the plan goes ahead, it will represent the first hybrid public-partnership project under B3.

SMC GLOBAL POWER

A second potential jumbo IPO has also been in the works for nearly a decade, but has been held back by a legal dispute. San Miguel’s power arm, SMC Global Power, first mandated an IPO in 2011. Then in 2014, it said it was still hoping to raise up to $1 billion through the sale of a 49% stake.

However, the group has been embroiled in a lengthy dispute with the government’s Power Sector Assets & Liability Management Corp (PSALM) over their respective interpretations of its contractual payments. Most recently, the Court of Appeal affirmed SMC Global Power’s writ of preliminary injunction against PSALM in May.

As one banker puts it, “the [President Rodrigo] Duterte administration is definitely more likely to strike a deal to solve this dispute than the last one. So let’s wait and see.”

Foreign investors have taken a similar tack. Since the end of January, the Philippines has witnessed consistent foreign outflows: $1.385 billion to the week ending August 17 according to Kotak Institutional Equities Research.

In a recent research report, BMI Research argues that the country will "continue to struggle as rising inflationary pressures spur a rate tightening cycle from the Bangko Sentral Ng Pilipinas (BSP), putting off potential issuers and stifling investor demand for deals in the underdeveloped ECM arena".

BMI expects the BSP to hike its benchmark overnight repurchase rate by a further 25bp to 4.25% before the end of 2018 and institute three more increases in 2019. “Such rate hikes will help to stabilise the currency, which has been on a weakening trend in recent quarters, but will take its toll on equity markets,” it concludes.

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