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San Miguel serves up an enticing spread

[HONG KONG] San Miguel has an alcohol problem. The Philippine conglomerate run by billionaire Ramon Ang is consolidating its beer and liquor businesses with its Manila-listed producer of meat, poultry and feed. A complex share swap suggests the enlarged San Miguel Pure Foods would be worth some US$9.1 billion. It trades at a discount, however.

The sprawling parent company decided, with advice from adviser ING Bank, that the newly conceived consumer group warranted a hefty premium. It determined that Pure Foods shares would be fairly valued at nearly 793 pesos apiece for the deal instead of the 308 where they were trading. That meant issuing 4.2 billion shares, with a notional value of 336 billion pesos (S$8.6 billion), to buy 51 per cent of unlisted San Miguel Brewery and 76 per cent of Ginebra San Miguel from San Miguel Corp.

Investors have been warming to the valuation, with Pure Foods stock roughly doubling since the combination was announced in November. That's understandable. The resulting group is something of a hybrid of Universal Robina, a US$7.4 billion local rival, and Thai Beverage, the owner of Chang beer and SangSom rum. They trade on an average multiple of a little over 20 times estimated 2017 earnings. Assuming all three San Miguel businesses grew at the same pace for the year as they did in the first nine months, Pure Foods would be worth US$7.4 billion, about 6 per cent more than the current theoretical post-deal value.

That, however, leaves a US$1.7 billion chasm from the company's own valuation. Some of that is probably down to limited trading in the shares. After the merger, San Miguel's control will rise from 85 per cent to 96 per cent, though not for long. New rules require at least a 15 per cent free-float by the end of the year. And Mr Ang has said he's aiming to sell 30 per cent.

A more widely owned and easily tradable stock could help. At the same time, fund managers should learn more about any cost savings, and about the brewery, which is an unlisted joint venture with little disclosure. Pure Foods has thrived selling liver pastes and other fare. Now San Miguel will have to be persuasive about a different kind of spread - its subsidiary's valuation gap.

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