SMC-Kirin deal to boost capital inflows

Global Investment banking leader J.P. Morgan said yesterday that President Arroyo appears to be taking an objective stance on the sale of a 15-percent stake in San Miguel Corp. (SMC) to Kirin Brewery Co. of Japan.

Retaining a "buy" rating on San Miguel shares, J.P. Morgan said it believes that the President is looking at the transaction as a positive step not just for SMC but also for the Philippines, as it will boost inward capital flows and confidence in the Philippine economy."

It added that the government is likely to retain the current management of San Miguel headed by its chairman and chief executive officer Eduardo M. Cojuangco Jr. J.P. Morgan said that a government move to vote out the current SMC management "would upset Kirin" as it was with the San Miguel chairman that the Japanese brewer recently forged an agreement for a buy-in into SMC.

"We think President Arroyo is unlikely to give Kirin’s buy-in her blessing and then allow the Presidential Commission on Good Government (PCGG) to upset Kirin, as this would in effect deter any other inward investment in the Philippines if potential investors believe government interference is a serious risk," J.P. Morgan commented. It further observed that the PCGG has toned down the rhetoric concerning the transaction.

Top executives of SMC presented details of the Kirin buy-in to the PCGG last Thursday. Representatives of the Japanese brewer are also scheduled to meet with the PCGG.

J.P. Morgan said that the deal could also ease concerns on corporate governance as Kirin would be entitled to two board seats in SMC under the buy-in agreement. In addition to ending the uncertainty over management control, the buy-in would be beneficial to San Miguel because it would bring in financial and human capital, it noted. New export markets could also be opened for SMC, while Kirin could learn from San Miguel, particularly in China where the company is profitable, J.P. Morgan said.

It added that the deal’s valuation, at P63 per share, seems fair and NAV (net asset value)-enhancing given the premium to the current share price. With the positive feedback received initially from minority stockholders on the Kirin buy-in, J.P. Morgan said it expects that the shareholders will support the transaction when it is presented to them for approval in February next year.