San Miguel Brewery pulls off price-sensitive IPO

Parent company San Miguel Corporation decides to spin off only 5% of its domestic beer subsidiary, while price sensitivity makes it "highly likely" that the price will be fixed at the bottom of the range.
San Miguel Brewery has attracted enough international demand to complete its initial public offering and will go ahead with the domestic portion of the deal on Monday. The final price wonÆt be announced until later today, but according to sources, it is highly likely to end up at the bottom of the Ps8 to Ps11 range. Based on the level of price sensitivity in the deal, it cannot really price anywhere else, they say.

Meanwhile, parent company San Miguel Corporation has decided to spin off only 5% of the listing candidate, which includes all of the groupÆs domestic beer operations, as opposed to the 10% that was flagged in the prospectus. Based on the bottom end pricing, this means the base deal size will be only Ps6.16 billion ($148 million). If the 15% greenshoe is exercised in full, the total proceeds would increase to about $170 million.

The fact that the parent company, which is the largest food, beverage and packaging company in the Philippines, is choosing to sell only a small part of the subsidiary isnÆt that surprising given the current low valuations. When the company made its initial regulatory filing late last year, the indicated price range was Ps9.50 to Ps16.30 per share, which suggests San Miguel Corp had harboured hopes of extracting a lot more value from the spin-off. Of the 770.5 million shares that will be sold based on a 5% free-float, 90% are secondary shares coming from the parent.

Still, San Miguel Brewery has avoided the fate of budget airline operator Cebu Pacific Air, which was forced to withdraw its IPO earlier in the year after tumbling equity markets led to lukewarm interest from investors. Cebu Pacific had aimed to raise up to $288 million. Asian equity markets have been somewhat more stable recently, but the Philippines remains the worst performing stockmarket in the Asia-Pacific this year with a 21% loss. Only Vietnam and China have fallen more.

This no doubt weighed on the demand for the offering and so did the small free-float as investors tend to avoid illiquid stocks on the basis that it is more difficult to get out of them quickly. That is particularly true when volatility is high and the market is on a declining trend. Sources say the fact that the orders from some international investors were only a tenth of the size that one would normally expect was likely due, in part, to such liquidity concerns. The number of investors participating in the deal was also quite small, at only about 15 or so.

But international demand was nevertheless ôcomfortablyö covered to the extent that the bookrunners are willing to go ahead with the domestic offering. Most of the demand came at the low end, however, which is quite natural as investors would want to have as much downside protection as possible.

The international tranche accounts for 70% of the total deal, while 20% will be offered to domestic institutions and 10% to domestic retail investors. Citi and ATR Kim Eng are joint global coordinators and bookrunners for the international offering, and ATR Kim Eng is also helping to arrange the domestic portion of the deal together with BDO Capital & Investment Corp.

Countering the negative trend in the Philippine market was the fact that some of its Asian brewery peers traded up during the roadshow, which made San Miguel BreweryÆs valuations look relatively more attractive. At the bottom of the price range, the brewery is valued at 13.7 times this yearÆs projected earnings. This compares with about 23 times for SingaporeÆs Asia Pacific Breweries and JapanÆs Asahi Breweries and 15.5 times for KoreaÆs Hite Brewery. Singapore-listed Thai Beverage trades at around 14 times, while San Miguel Corp trades at a 2008 P/E of 13.7 times û all according to Bloomberg.

Analysts argue that San Miguel Brewery deserves a higher valuation than its parent since it is the ôbest partö of the group. However, with the parent still owning 95% of the company, a similar valuation does seem reasonable.

A key attraction of the deal is the fact that San Miguel Brewery intends to pay 100% of its recurring net income as dividend every year û making it something of a defensive play at a time when the local market is struggling. Assuming an IPO price of Ps8 per share, the expected dividend yield for 2008 is about 7.3%, which is very attractive compared with other beer producers in the region. According to analyst forecasts compiled by Bloomberg, Thai Beverage trades at a 2008 dividend yield of around 3.8%, while Hite and Asahi return around 1%. San Miguel Corp is expected to provide a dividend yield of 3.2% this year.

San Miguel Brewery is the dominant beer producer in the Philippines with a market share of about 95% and a product portfolio of eight beers, including the top four brands in the country. Despite this overwhelming market position, which will limit the growth prospects, the company believes that it will be able to expand in certain parts of the country where its market share is less than 85% and also argues that its strong brands and economies of scale put it in a good position to capture ôa very large portionö of the overall industry growth.

Research firm Canadean estimates that beer sales in the Philippines grew by 5% in 2007 and San Miguel Brewery argues in its preliminary prospectus that industry volumes will continue to grow this year thanks to an expected GDP growth rate of 6.3%-7% and relatively low inflation.

This is the second Filipino company to list this year after Pespi-Cola Products Philippines. The exclusive licensed bottler of PepsiCo in the Philippines raised Ps4 billion ($111 million) from a UBS-led IPO in January after fixing the price at the bottom of the offering range at Ps3.50 per share. The stock fell 18.6% on the first day, touched a low of Ps2.48 in mid-March and has yet to go above the issue price. Yesterday it closed at Ps2.95.
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