MANILA The retail arm of SM Investments, the Philippines' most valuable conglomerate, has finally won regulatory approval to acquire a leading local bakery chain, but only after a lengthy review -- a sign that the country's new antitrust watchdog is starting to flex its muscles.
The acquisition, which involves over 500 branches of Goldilocks Bakeshop, was at a standstill for more than four months before the Philippine Competition Commission gave its approval on Jan. 9. To receive that green light, SM had to pledge not to kill off Goldilocks competitors.
The deal highlights the tighter regulation of mergers and acquisitions since the antitrust body was put into place in 2016.
Among the competition issues raised during the PCC's four-month review was the possibility of "partial or total foreclosure" of Goldilocks competitors. Partial foreclosure refers to discriminatory behavior against competitors, which in this case could include offering less favorable locations or lease terms at SM properties to tenants owned by competitors.
SM Retail, the acquiring company, is a sister company of SM Prime Holdings, the largest mall operator in the country. It leases space to many Goldilocks outlets, as well as to competitors like Red Ribbon, a subsidiary of Jollibee Foods.
The PCC was also concerned that SM Group would have the opportunity to "share a competing mall tenant's business information [with] Goldilocks," because its malls operate a point of sale system that records the sales of its tenants.
SM in December promised to protect the commercial information of Goldilocks Bakeshop competitors and to give them a "fair shake in their lease at all times."
The PCC warned SM Group that it is legally bound to honor its commitments, and that breaches could result in fines and other penalties. PCC inspectors will monitor compliance for five years.
Before the establishment of the PCC, there was no antitrust regulation limiting Philippine companies' expansion. This allowed them to grow quickly through M&As, which in turn helped fuel the country's recent economic boom.
San Miguel, which has diversified beyond brewing to become the Philippines' biggest company by sales, is a prime example. From 2008 to 2014, it spent around $12 billion on acquisitions, according to Reuters. That figure does not include recent purchases, like the $1.9 billion Masinloc coal power plant currently under review by the PCC. The conglomerate's 2016 revenues of 685 billion pesos ($13.6 billion) represented 4.5% of the Philippines' gross domestic product.
However, PCC Chairman Arsenio Balisacan, who was the socioeconomic planning secretary under former President Benigno Aquino, told the Nikkei Asian Review in September that the recent economic resurgence was "highly concentrated among a few sectors" and that its limited impact on poverty reduction was due to "the lack of competition."
This view has encouraged the watchdog to increase its scrutiny of business arrangements -- not just M&As -- that may affect consumers.
The most controversial issue on the PCC's radar is the Philippine telecommunications duopoly, which President Rodrigo Duterte himself wants to dismantle. At their meeting in November, Duterte invited Chinese Premier Li Keqiang to invest in the country's telecom sector. China responded quickly by endorsing China Telecom, one of the mainland's major service providers, to make the move.
Duterte's attempt to shake up the duopoly of PLDT and Globe Telecom has energized the antitrust watchdog, whose oversight efforts in the telecom sector have been dogged by legal setbacks.
"The president's invitation for FDI in all different sectors [is] welcome," PCC Commissioner Johannes Bernabe said on Dec. 12. "This is particularly welcome in the case of telecommunications. We have two major service providers, and a third or fourth player will offer not only competition but also better quality of services."
The PCC is more than willing to work with the National Telecommunications Commission to facilitate the entry of a new player, Chairman Balisacan said on Dec. 22. "We are also open to helping the government in designing the [entry] terms, at least from the competition lens."
The PCC was established in early 2016 as a quasi-judicial body to ensure a level playing field for companies. Its mandate is enshrined in 2015 Philippine Competition Act, whose passage ended 25 years of business lobbying against antitrust legislation.
But a court has effectively barred the new watchdog from touching the telecom duopoly. The two-way competition has existed since 2011 and was consolidated in May 2016 when San Miguel, the only viable challenger at the time, sold its telecom assets to PLDT and Globe Telecom for nearly $1.5 billion.
ASSERTING ITSELF In early December, the PCC asked the Supreme Court to reverse an appellate court ruling that the San Miguel deal had been "deemed approved," thereby preventing the watchdog from conducting a review.
The court proceedings are the latest development in a yearlong clash between the PCC and the powerful groups involved in the sale: Ayala Corp., the oldest conglomerate in the Philippines and the parent of Globe Telecom; Hong Kong's First Pacific, the principal shareholder of PLDT; and San Miguel.
Winning this legal battle is considered crucial for the PCC if it hopes to assert its authority over M&As.
It is also important for China Telecom, which needs enough frequencies to compete. Had the PCC been allowed to review the asset sale, it would have been able to force PLDT and Globe Telecom to relinquish some frequencies to a third player, according to PCC Commissioner Stella Quimbo. She said a Supreme Court ruling is necessary to review the deal.
Businesses, however, have accused the PCC of overregulation. Some executives have complained that the 1 billion peso threshold for triggering an M&A review is too low, and that the PCC review process is too demanding. "They are asking for a lot of information, and it looks like they're just trying to build a database," said one executive at a major conglomerate who declined to be named.
In addition to scrutinizing mergers, the PCC has also launched probes into alleged collusion by cement manufacturers, and into an alleged "garlic cartel" that was accused of manipulating clove prices in 2014.
Balisacan said the PCC will focus on enforcement in 2018, as the two-year period for companies to rectify any anti-competitive practices ended last August. The commission plans to form alliances with other government agencies to enforce its regulations.
On Dec. 22, the PCC and the central bank agreed to harmonize their rules on M&A and other activities amid growing interest from foreign banks in expanding in the Philippines, which liberalized the sector in 2014. The two bodies also agreed to monitor financial institutions' payment systems and other activities.
For 2018, the PCC said it wants to partner with the Insurance Commission, the Intellectual Property Office, the Department of Trade and Industry and the National Bureau of Investigation.
"We expect considerable interest from the public in filing cases with the PCC. In fact, we are seeing that now," Balisacan said.