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San Miguel sells jumbo peso bond

Philippine investors gulp down the beer-maker's Ps39 billion bond, despite the gloom in international markets.

San Miguel Brewery raised a whopping Ps38.8 billion ($800 million) on Monday in a record-breaking peso-denominated bond sale that provides a neat demonstration of the liquidity still available in some domestic markets, even as the global financial crisis continues to suck liquidity out of international markets.

The deal was split into three tranches -- a three-year bond that pays a coupon of 8.25%, a five-year bond that pays 8.875% and a 10-year bond that pays 10.5% -- all of which are roughly equivalent to a 250bp spread over the comparable government bonds. The pricing, which was determined by Dutch auction, was roughly in line with the market's expectations. Bankers on the deal say the offering was oversubscribed, but exact details on the level of demand were not released last night.

The size of each tranche was also not officially released, but roughly Ps14 billion will be sold in the three-year tranche, Ps22 billion in the five-years and Ps3 billion in the 10-years. HSBC and the Development Bank of the Philippines led the deal, with Standard Chartered, ING, BDO Capital, First Metro Investment, BPI Capital, China Bank, Land Bank of the Philippines and Philippine Commercial Capital all acting as joint underwriters.

San Miguel is one of only a handful of issuers in Asia with the profile to pull off a deal of this scale. The company has totally dominated the Philippines' beer market for more than 100 years and now has a 95% market share, making it one of the best-known brands in the country and, at the same time, a hugely profitable and stable business. In other words, a perfect credit for investors who want a pick-up over government bonds without too much added risk.

San Miguel is such a good business that many investors have been asking why the management of its parent company decided to sell it at all. The domestic beer business earned about 25% of the revenues for San Miguel Corporation and 70% of its profits, but the executives complained that beer is a low-growth business. To grow, they needed to diversify, so they sold 49% of the company last year, mostly to Kirin, a Japanese brewer.

The parent company has used the sale proceeds to buy 27% of Manila Electric Company (Meralco) and to commit to taking control of oil refining and marketing company Petron, as well as for smaller deals such as the acquisition of Liberty Telecom, all of which are far outside its core competency.

"You have to wonder about the strategy," says one equity analyst in Manila. "San Miguel Brewery's return-on-equity has consistently been around 30% and they're using the proceeds from its sale to invest in businesses that are heavily regulated and where the returns are around 10%. That doesn't seem to do the shareholders a favour."

The bond offer is connected to the sale of the brewery. In the past, San Miguel Brewery operated as little more than a bottling operation for its parent, paying a 100% dividend up to San Miguel Corporation and with most of its assets also owned at the parent level. Kirin would prefer the business to stand on its own, which means buying the land and brands and so on that it needs to operate as a separate business.

And, because it has always given away all of its profits, that means it needs to borrow to do so. Initially, the brewery planned to raise some of the money from international investors, but when bankers determined there was sufficient local demand, the company opted for cheaper funding in favour of expensive diversification.

So far in 2009, no Asian corporates have sold bonds to international investors. Posco, the Korean steelmaker, is in the market, but has needed to mandate five banks to raise a smaller sum than San Miguel's domestic bond.

The liquidity available in the Philippines today can be partly explained by two phenomena. First, the domestic economy remains relatively unscathed by the problems elsewhere in the world -- and to a lesser extent than during its many previous downturns. "This is an economy that's used to crises," says one source. Second, investors everywhere in the world are in retreat to their home markets, cashing out of overseas investments and transferring them to assets they are comfortable with. And, for Filipinos, there are few names more comforting than San Miguel.

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