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Current trends in the Philippine M&A landscape

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Miguel Carlo S. Rancap

Suits The C-Suite

According to the World Bank’s June 2018 Global Economic Prospects report, the Philippines is the 10th fastest-growing economy in the world, stimulated by rising consumption, sustained remittance inflows, stable investment, improved government spending and accommodative monetary policy. These were key considerations for some recent mergers and acquisitions (M&A) deals characterized as defensive, synergy-driven, and horizontally and vertically integrated. These recent deals are leading some parent companies to further penetrate the existing market and to also enter into new markets. What this trend tells us is that strategically, companies are doing it because they need to grow and survive over the medium- to long-term.

In addition, these recent deals have one common need — to find new avenues for growth in mature markets or cope with accelerating change.

In an article published in an EY (Ernst & Young) publication titled Private equity briefing: Southeast Asia, the SGV Transaction Advisory Services team highlighted the current M&A environment in the Philippines and how its vibrant economic landscape will translate to increased M&A activity.

• The Philippines ranked 42nd out of the 125 countries in the 2018 Venture Capital (VC) & Private Equity (PE) Country Attractiveness Index, climbing up from its 45th spot in 2014. The index, published by the University of Navarra, measures PE and VC attractiveness based on economic activity, depth of capital market, investor protection and entrepreneurial opportunities.

• In 2017, M&A activity was 43 transactions with a total value of $13 billion. These represent a decline of 8.5% in terms of deal volume and a 42.9% increase in deal value from 2016. Three of the top transactions in terms of value over the last two years occurred in 2017.

• The sectors with the most active M&A activity in 2017 were financial services, energy and consumer goods. With the Philippine economy forecast to grow by 6.9% annually from 2017 to 2021, these sectors, including construction, will continue to play a pivotal role in potential M&A deals.

• Aggressive infrastructure projects will promote M&A. This is on the back of the current administration’s pledge to spend P8 trillion to P9 trillion on infrastructure until 2022 or up to 7.0% of GDP through the completion of various infrastructure projects.

• The Philippine Competition Act was finally signed in July 2015. The law ensures fair market competition among businesses, regulates monopolies, reviews M&A deals with transaction values above P2 billion ($38 million), and assesses whether a transaction will restrict competition in the relevant market. This will further increase the confidence level of domestic and foreign investors as it protects and maintains a level playing field for business opportunities.

Moreover, we summarize the top deals in 2017 based on deal values (and excluding intragroup acquisitions) as follows:

• A power generation company acquired another coal-fired power generation company. The transaction will enable the buyer to improve its baseload capacity to further ensure its ability to provide an affordable and reliable supply of power to its customers, particularly in Luzon. The additional power assets will also provide an opportunity for the buyer to increase its footprint in clean coal technology. The transaction will result in the production of electricity in an environmentally responsible way.

• A consortium formed by a global infrastructure asset management company and a Singapore-based investment company acquired a geothermal energy company. The acquisition will enable the consortium to acquire a significant economic interest in the target company to promote long-term growth for the target company.

• A Japanese tobacco manufacturer acquired the tobacco-related assets (including intellectual property) of an integrated tobacco company. The transaction will allow the Japanese bidder to enhance its market share in the Philippines, utilizing the target company’s distribution network and brands, including its manufacturing equipment, and inventory.

• An investment holding company acquired another investment holding company with investments in electricity distribution. The acquisition will realign the buyer’s portfolio towards a more appropriate strategic ownership mix. The transaction is expected to deliver incremental profits and cash yields to the bidder.

• A Switzerland-based alternative asset management company and a private equity firm acquired a business process outsourcing service provider. The acquisition will enable the target company to enhance and expand its operations both organically and through select acquisitions.

• A toll road project developer and construction company acquired a company engaged in the operation and maintenance of an expressway. The transaction will have improved economies of scale and efficiency of operations and will enable the bidder to procure financing and credit facilities under more favorable terms. The merger will enable productive use of the properties currently owned by both the target company and the bidder.

• An investment holding company acquired a shipping company. The transaction will provide another growth platform for the buyer’s retail business.

• A company engaged in the trading of refined petroleum and chemical products acquired another company engaged in the selling and marketing of liquefied petroleum gas (LPG) and other petroleum products. The acquisition of the LPG business is a strategic fit for the buyer as it broadens its product portfolio and petroleum presence across the country. The acquisition will provide the buyer with cross-selling opportunities in fuel and LPG to consumers and corporates.

Finally, we highlight the following top sectors in which potential investors can participate:

CONSUMER GOODS/RETAIL
• Filipino middle-class households are on course to enjoy an enhanced capacity for discretionary spending, as the median disposable income in the country is set to reach $11,400 (at constant 2014 prices) per household in 2030, representing a significant 70.0% real gain from 2014.

• The Philippines has entered its demographic window with a growing and youthful population, allowing a transition towards greater productive participants and higher consumption due to increasing GDP per capita.

ENERGY
• The energy sector continues to be on an upward trajectory as it has registered an average of 5% expansion in production since 2010. The government is currently investing in petroleum, coal, and renewables to meet the growing energy demand. As of 2017, the country is one of the largest geothermal producers in the world.

• The number of players in the oil and gas sector is expected to increase as more activity is taking place in the upstream and downstream business.

CONSTRUCTION/INFRASTRUCTURE
• The Philippines is about to enter a “golden age” of infrastructure with the current administration’s Build, Build, Build program. Public spending on infrastructure projects is estimated to reach P8 trillion to P9 trillion from 2017 to 2022.

• The construction industry is projected to steadily expand at an average real rate of 9.8% between 2017 to 2026, underpinned by the country’s accommodative development plan from 2017 to 2022, continuous population growth, rapid urbanization and favorable government policies towards public-private partnerships.

LOGISTICS/TRANSPORTATION
• Industry growth hinges on greater trade activity resulting from stronger international cooperation, an improving business environment as well as the positive global economic and trade outlook.

• Air freight will outpace all other freight modes with a projected 7.7% average growth rate in terms of tonnage over the medium-term. Several high-value deals centered on the logistics industry were initiated in 2017 and are expected to be consummated in 2018.

BANKING AND FINANCIAL SERVICES
• The banking and financial services sectors are expected to exhibit robust growth in the next five years as justified by sustained economic growth, a growing middle class and stable banking sector.

• Banking penetration rates remain low by global standards, signifying significant customer potential from the middle class. More opportunities are likewise seen for asset management services due to the economy’s favorable growth trajectory.

As the Philippines’ economic outlook remains positive, it is poised to continue as one of Southeast Asia’s top growth performers. The burgeoning middle class, rising consumer confidence, and higher government outlays are foreseen to become the major stimulants of the wider economy leading to increased M&A activities in the years to come.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.

 

Miguel Carlo S. Rancap is a Transaction Advisory Services Director of SGV & Co.