Jul 5, 2014

Philippines - Flurry of mergers seen, as foreigners set sights on PH growth story

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US-based AES' $453-million sale of the Masinloc coal-fired power plant to Thailand's EGAT is one of the cross-border deals last year.

MANILA – The Philippines may see a flurry of cross-border mergers and acquisitions (M&As), as regional firms want to take a piece of one of Southeast Asia's fastest-growing economies, according to the investment banking arm of the Metrobank group.

In a briefing, First Metro Investment Corp (FMIC) senior vice president Justin Ocampo said corporate deals involving divestment from local owners have attracted "quite a bit of interest" from regional players.

"We have live transactions," said Ocampo, who also heads the George Ty-led firm’s investment banking group.

"In the past prior years, we would have interested buyers from the local market, but in recent transactions, we have seen buyers from regional as well as Asian companies. We anticipate quite a bit more action in terms of cross-border both outbound and inbound," Ocampo said.

Last week, AES Corp of the United States sold its 41 percent stake in the 630-megawatt Masinloc power plant in Zambales to Electricity Generating Public Co Ltd of Thailand for $453 million.

"As an offshoot of global realignment, we expect quite a bit of domestic realignment as well," Ocampo said, adding that banking and consumer are sectors that may see a flurry of M&As.

One key driver of M&As in the Philippines is the Asean Economic Cooperation, which aims to attract foreign direct investments (FDI) through the reduction of business costs associated with multinational activities in the region.

The Asean integration will create a European Union-style single market that aims to ease cross-border trade through lower tariffs. It will liberalize areas such as air transport, business services, construction, financial services, maritime transport, telecommunications and tourism.

Despite a slowdown in growth to 5.7 percent in the first quarter, the Philippines, once dubbed as the Sick Man of Asia, remains one of the fastest-growing economies in the region, behind only Malaysia and China.

"This is not just a consumer-based expansion of the economy. Investments in the last 5 or 6 quarters were growing by double digits. The first quarter of the year was no exception," said University of Asia and the Pacific economist Victor Abola.

The Philippines is about to enter the demographic sweet spot, a period where majority of the population will be joining the work force, thus fuelling spending power and providing the opportunity for accelerated economic growth rates, the economist said.

As foreign firms invade the Philippine market, Filipino companies are also spreading their wings and looking at opportunities overseas.

"The Filipino companies, their balance sheets are healthy and the cost of borrowing is low. The market here is becoming small and anticipating AFTA, a lot of them are looking at newer markets," Ocampo said, referring to the Asean Free Trade Agreement.

In their first overseas investments, Manila Electric Co bought into a 2-by-400 megawatt liquefied natural gas plant in Singapore, while Aboitiz Equity Ventures Inc purchased a controlling stake in one of the biggest aqua feed producers in Vietnam. Metro Pacific Investments Corp acquired a stake in Thai tollroad operator Don Muang Tollway.

"Even small companies are looking at buying," Ocampo said.

Corporate deal making paved the way for an active pipeline of corporate bond issuances, hitting P115 billion in the first 6 months of the year to surpass the P83.5 billion raised for the entire 2013. However, debt issuances may slow down in the second half as most companies have locked in their funding requirements.

"The sideways expectation in terms of interest rates provides a window for issuers to continue to tap the bond market for their financing needs. The market continues to be liquid. Investors are becoming more selective in terms of pricing and structure," Ocampo said.

Likewise, a handful of firms are rushing to tap the equity market in the second half after missing out on the stock market's 16 percent rally in the first half. Equity-raising fell by nearly a third in the first semester to P76 million from P111 million a year ago, as issuers expected volatility in the stock market.

"The economic outlook for the Philippine economy remains favorable despite a slower than expected GDP growth in the first quarter. Heightened government spending, strong consumer demand and remittances from the over 2 million OFWs will continue to drive growth. Confidence in the real economy remains high given the country's strong external liquidity and investment position and effective monetary policy," said FMIC president Roberto Juanchito Dispo.

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