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San Miguel sacrifices mobile dream to Philippine politics

San Miguel President Ramon Ang speaks to reporters on May 31, the day after announcing his company will sell off its telecom business.

MANILA -- San Miguel is arguably the most audacious Philippine company. Once a food and beverage maker, in recent years it has been getting into industries it had no prior experience in. This past week, its expansion mode shifted to better suit the economic priorities of an incoming government and the country's changing competitive environment.

On May 13, San Miguel President Ramon Ang told reporters the much-anticipated launch of his company's mobile broadband service was facing a delay. Nevertheless, Ang said, the service was still on track to break the duopoly enjoyed by Philippine Long Distance Telephone and Ayala Corp.-led Globe Telecom and to do so this year.

Only weeks later, Ang would make an about-face. This past Monday, San Miguel announced it would unload its telecom assets housed under Vega Telecom, selling half each to PLDT and Globe. Its relatively dormant telecom business was priced at $1.5 billion, around a fifth of Globe's market value.

Shares in San Miguel jumped 5.8% that day, PLDT's stock surged 9.1% and Globe's climbed 5.6%. The broader market experienced a 0.7% uptick. The three companies closed the week mixed. San Miguel shares on Friday rose 1.9%, PLDT's gained 1.5% and Globe's dropped 2.1%.

"The deal meant the telecom duopoly was preserved, with San Miguel gaining extra cash," said Luis Limlingan, managing director at brokerage Regina Capital Development.

Breaking into the telecommunications sector had been a pillar of San Miguel's diversification plan. In 2010, the company began bulking up on assets through Vega Telecom. The idea was to eventually challenge PLDT and Globe, two of the region's most profitable telecom companies by gross margin. In 2014, Ang said San Miguel was prepared to invest an initial $2 billion in the foray.

The businessman was confident that the around 300 billion-peso industry could accommodate a third player. "Our cellphones are barely working," Ang said in November, echoing widespread frustrations over the country's slow data speeds.

Ang's sudden and dramatic course change is not a total surprise. There have been signs. In March, San Miguel terminated talks with Australia's Telstra to set up a telecom joint venture.

On May 17, Ang said his company would ramp up its investments and operations in Mindanao, the Philippines' southernmost main group of islands.

The announcement of a $1 billion-plus investment package for the region came in the wake of elections on May 9 that made Davao Mayor Rodrigo Duterte the first president-elect to hail from Mindanao.

Duterte assumes the Philippines' presidency on June 30.

For a conglomerate that makes 87% of its sales from Luzon, the northernmost and most populace of the Philippines' three main groups of islands, and Visayas, the main group of islands in the central part of the country, the new southern investment plan marks a significant shift. Luzon, after all, is responsible for around two-thirds of the Philippines' gross domestic product.

In the presidential elections, San Miguel's top executives initially placed big bets on Sen. Grace Poe, the most popular presidential candidate until April. Poe promised to liberalize the economy and was said to have been the most business-friendly candidate. The Nationalist People's Coalition, a party founded by Eduardo Cojuangco, San Miguel's chairman and CEO, backed Poe. Ang, meanwhile, allowed Poe to use his personal helicopter during the campaign.

After Duterte's landslide victory last month, San Miguel's top two executives moved quickly to realign the company's political position and investment plan to Duterte's priorities. Duterte has been vocal about initiating a transition to a federal government that could help foster economic growth outside the capital, where much of the country's recent boom has been concentrated.

"We will make more jobs [in Mindanao]," Ang told reporters on May 17, two weeks before Duterte was officially proclaimed president, on May 30.

San Miguel's decision to pull out of the mobile phone business also came May 30. The decision was spurred by Duterte's rise. The feisty president-elect has said he will open the Philippines' telecommunications sector to foreign players if the domestic telcos do not speed up internet connections.

By selling off Vega Telecom for $1.5 billion, San Miguel adds to a war chest that can be used to invest in the incoming president's home region.

The Philippines last year passed its first competition law, and the Philippine Competition Commission, an antitrust watchdog, is due to start work this year. The new competitive environment that these steps promise were seen paving the way for San Miguel to enter the mobile phone market.

Yet they were not seen guaranteeing success to San Miguel in the country's already highly competitive telecommunications industry.

"By entering the telecom business, they [would] be competing with established players," said Lovell Sarreal, an analyst at Maybank ATR Kim Eng. "And looking at the experience of Digitel, it took a long time to become profitable."

Digital Telecommunications Philippines, or Digitel, was the telecom unit of Gokongwei-led JG Summit Holdings, which had a short-lived success as a third player before being sold to PLDT in 2011.

In a highly competitive and capital-intensive business, launching a mobile internet service without a foreign or technical partner is a kiss of death, said Edgardo Cabarios, deputy commissioner at the country's telecommunications commission.

Ang said divesting the business was a "very, very hard decision for the company." He also described the decision to give up its telecom ambition as a "sacrifice." In reality, however, San Miguel may have been merely picking its battles.

Outside the Philippines, San Miguel is best known for its eponymous beer. At home, it is the biggest corporate group by revenue with exposure to an array of industries, thanks to an expansion plan Ang came up with in 2007 to counter slowing growth in the food and beverage sector.

San Miguel began by raising funds. Japan's Kirin Holdings helped with that by buying half of the brewery. Other food and beverage assets were also sold off.

Ang then led an investment spree, piling into oil refining unit Petron, power generation, telecommunications, banking, mining, cement as well as road and transport infrastructure. The company also bought into electricity distributor Manila Electric and Philippine Airlines, which were later divested.

Ang also spearheaded San Miguel's push in infrastructure business since 2009. Now he has the company morphing into an infrastructure behemoth, with an expanding network of toll roads in the Philippines. It is currently building an 18 billion-peso ($390 million) expressway connecting Manila's airport to a gaming hub near Manila Bay, as well as a 37.4 billion-peso elevated highway linking the northern and southern outskirts of Metro Manila. In April, construction of a 69.3 billion-peso railway in the northern outskirts of Manila began.

There are plans to pitch a $10 billion airport project to Duterte. The outgoing government of President Benigno Aquino received the same pitch but gave it the cold shoulder.

Ang said his diversified conglomerate will bid for all projects under the government's $20 billion-plus Public-Private Partnership Program.

"The goal of San Miguel is to be able to help the Philippines build more infrastructure and provide a better place for the countrymen by having more roads, toll roads, trains, ports, and bigger and more efficient airports," Ang said in November 2014, on the sidelines of the Nikkei Global Management Forum in Tokyo.

The conglomerate's diversification saw a tipping point when it was hit hard by a fall in crude prices. In 2015 the group's consolidated sales dropped 13% to 673.9 billion pesos while net income barely grew at 29 billion pesos. Petron, which chips in more than half of the conglomerate's sales was significantly affected by the global oil glut.  

However, San Miguel managed to cushion the shock by the integration of a tollway business with a revenue of 13.3 billion pesos into its books.

"We will focus on our core business, infrastructure," Ang told reporters on Tuesday, the day after the company announced to cash in its telecom assets.

Going forward, San Miguel will be further betting on a sector that the government has vowed to support. The Duterte administration plans to keep the Public-Private Partnership program going, albeit with possible new rules. The incoming president also plans to boost infrastructure spending to 5% of the GDP from 3.5%.

Under Duterte's planned policies, Ang sees additional room for growth especially in rural provinces. The GDP growth of Mindanao outpaced the country's 6.1% expansion in 2014, with Davao region's 9.4% growth being the fastest nationwide. 

As of 2015, infrastructure made up 2% of San Miguel's total revenue, but 9% of operating income. With two additional tollways expected to be finished in the next three years, and one railway project in the next four years, infrastructure could provide a steady and recurring earnings to San Miguel.

In Mindanao, San Miguel will launch its first industrial park in Davao later this year. Apart from three more industrial parks, each equipped with its own 300-megawatt power plant, San Miguel also plans to open more gasoline stations and feed mills on the main Mindanao island, Ang said.

With a high reliance on its domestic business, San Miguel needs to ride with the political tides to keep afloat. Many Philippine companies have gotten behind Duterte's plan to disperse business outside current commercial centers, but none so much as San Miguel.

Still, San Miguel must also think ahead. The presidential term in the Philippines is six years. So in 2022, the company might have to redefine its audacity one more time.

-- Company in focus

-- CEO in the news

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