While San Miguel Corporation (SMC) has become one of the country’s most active buyers in recent multi-billion-peso business deals, a question nags: What’s in it for the 18 million coconut farmers who have been claiming ownership of a major chunk of the giant conglomerate?
 
The farmers have been asserting their rights over more than 750 million shares, or 24 percent of SMC, for over two decades now. 
 
The shares’ value has been on a rollercoaster ride since, but only events of the last two years have caused a marked decline of as much as P23 billion.

Currently, the fate of these shares is in the hands of the Presidential Commission on Good Government (PCGG), which is tasked to oversee assets sequestered from late dictator Ferdinand Marcos and his allies, including SMC chair Eduardo Cojuanco Jr.
 
PCGG is asserting that farmers’ money was used to accumulate 446.45 million SMC “A” shares (may be owned by Filipinos) and 307.40 million “B” shares (may be owned by Filipinos and foreigners).
 
Five PCGG representatives sit on the board of SMC to protect the coconut farmers’ interest in the decisions made by the company.
 
PCGG and SMC management are likely to face the Congress, which wants to probe into the beer-based conglomerate’s recent investments and how these could have affected the value of the farmers’ stake.
 
Huge losses
 
Two years ago, selling the disputed stake in SMC would have handed the coconut farmers—or other group that stands to benefit from a piece of Asia’s then biggest food and drinks company—a bag overflowing with some P52 billion cash.
 
That stake’s value has shrunk by almost 22 percent as of Monday, April 13, and as much as 44 percent in the first half of 2008, when SMC A and B shares settled at their year-lows of P38 and P39, respectively.
 
These dips are significant since they translate to losses of between P11 billion and P23 billion.
 
If the disputed stake is eventually awarded to the 18 million small coconut farmers, they will end up shouldering the billion pesos worth of losses.
 
What happened?
 
In recent months, events beyond SMC’s control, including the gloomy market sentiment due to the global economic crisis, have depressed the conglomerate’s stock prices. 
 
But there were several decisions by SMC itself that contributed to the stock prices’ fall. At its annual stockholders’ meeting in July 2007, it announced a plan to enter heavy industries.
 
From P74.50 and P81.50 a piece then, SMC’s respective A and B shares are now trading at P54 and P54.50. At these prices, the disputed stake could sell for P41 billion—a whopping P11 billion less than its value two years ago.
 
Analysts believe the erosion in SMC’s market value was not just because of widespread risk aversion due to the crisis, but also confusion over its business strategy.
 
It was changing tack from its food and drinks-focused stable businesses to mining, power, and utility industries, which were supposedly more exciting and would provide higher growth rates.
 
Throughout the company’s acquisitions, its president Ramon Ang consistently emphasized that they want to offer more shareholder value that can no longer be attained by mere organic growth.
 
SMC’s grand diversification plan, however, has yet to fully play out.
 
New portfolio
 
Since 2008, SMC has aggressively entered into deals that added gold and copper company Philex Mines, oil retailer giant Petron Corp, and electricity distributor Manila Electric Company (Meralco) into its business portfolio.
 
It has also announced intentions to penetrate the telecommunications industry through a broadband venture with a Qatari firm and accumulation of indirect stakes in several financially distressed telecommunications companies.
 
Justino Calaycay of Accord Capital Equities Corporation noted that “power is a promising venture. Some experts have predicted a power shortage by 2010 and incentives would be offered to new investors coming into the sector. Telecoms also offer high growth.”
 
Funding SMC’s buying binge are the proceeds from the sale of its food and beer assets—Coca-Cola Bottlers, Del Monte Pacific Ltd., National Foods, J. Boag & Son, brewery and packaging arms—here and abroad.
 
Recently, it also successfully floated a P38.8 billion corporate bond.
 
While some analysts were excited about SMC’s decision to move away from its food and beer core competencies to brave the unchartered territories of highly-regulated and capital-intensive industries, many others begged to differ.
 
SMC earlier said it would spend P35 billion or 10 percent of its total assets in its entry into new businesses. The Petron and Meralco deals were already worth around P63 billion—both considered as “very expensive” by some analysts. 
 
Credit watchdogs Moody’s Investor Service and Standard & Poor’s Rating Services both slapped SMC with ratings downgrade, saying the company’s investment plan could affect its financial profile and ability to pay debts.
 
S&P noted “the lack of a track record in these complicated and capital-intensive industries could represent a major challenge for SMC” just as Moody’s said the company’s “new energy businesses are more cyclical than the relatively stable beverage and food businesses in which it has established a long and successful track record.”
 
A research head at a broker firm told abs-cbnNEWS.com that “[SMC’s] strategy is subject to debate. An investor would wait to see how its recent business decisions would turn out. It's hard to say if the company’s attractive at the moment.”
 
Given that SMC’s new investments will take time to bear fruits, the company’s fundamental value—and that of the farmers’ disputed shares—are “suffering,” another analyst explained.
 
Sale of brewery
 
Another major hit to what the farmers could eventually be awarded with is SMC’s sale of its crown jewel, San Miguel Brewery (SMB).
 
For years, SMC’s value as a company was closely linked to that of the brewery, which had a stable business performance and dividend contributions to the shareholders of parent SMC. 
 
SMC used to wholly own the brewery business until the recent changes. In February, SMC put its 43 percent stake in San Miguel Brewery in the auction block.
 
Kirin Holdings of Japan promptly sold its 20 percent stake in parent SMC and acquired the brewery shares for sale for P59 billion.
 
Because San Miguel Brewery has already penetrated the domestic market and offers little opportunity for growth, SMC defended the move saying the business could grow well regionally with Kirin behind the steering wheel.
 
The Japanese brewer previously invested in SMC because the latter had the intellectual property rights over the brewery business’ domestic beer brands.
 
In the end, Kirin had to shell out an additional P20 billion for its direct 43 percent stake in San Miguel Brewery and the cost of the beer brands.
 
It was an amount that other shareholders of SMC—including the coconut farmers, who probably wanted to keep the brewery—did not have.
 
These SMC shareholders now have to contend with just a 51 percent share in San Miguel Brewery’s boring—but dependable—earnings stream and hold their breath for the promised returns in the new ventures.