Philippines-based food and beverage giant San Miguel recently fought off competition from New Zealand dairy giant Fonterra to acquire National Foods, leader in the Australian dairy market. As San Miguel integrates the company into its existing operations, analysts are asking if this marks the end of San Miguel's ambitions in the region. David Robertson reports.

San Miguel's acquisition of the Australian dairy leader, National Foods, is the company's most significant move in a strategy to diversify across the Asia-Pacific region. The A$1.9bn deal, which was completed last month, is the Philippine company's largest takeover yet.

The deal has added key Australian brands like Pura milk and Farmers Union to the San Miguel stable. National Foods is also the market leader in fresh dairy foods with yoghurt brands that include Yoplait, Divine Classic and Yo-Go.

But this is not San Miguel's first move into Australia. A year ago it bought a 50% stake in Berri Limited, which controls 80% of the Australian juice market. Its branded products - Berri, Just Juice and Our Daily Juice - have more than 50% of the market. (San Miguel also owns the J. Boag & Sons brewery in Tasmania.) In under a year the Philippine company has been able to move into Australia in a big way, taking control of the largest dairy and juice manufacturers.

These two divisions, National Foods and Berri, are now set to be merged but the big question being posed in Australia is whether this will be the end of San Miguel's ambitions in the region.

San Miguel is best known for its self-branded beer, which, in its domestic market of the Philippines, has a 90% share. But the company is much more diverse than just this one brand: it sells canned foods, processed meats, soft drinks, bottled water and it is also a major player in agribusiness. Much of the company's operations are still based in the Philippines and this geographic concentration has forced its management to adopt an aggressive expansion strategy.

As JP Morgan noted recently, the "pressing issue for San Miguel, however, is its growth prospects. Amidst high market share domestically, growth is intended to come from its ambitious regional expansion - a necessary evil as the benefits will take time to come."

Bidding war

In 2004 San Miguel bought a stake in King's Creameries of Singapore, acquired a brewery in Thailand, signed a joint venture with a Thai spirits company and bought a food packaging company in Malaysia. However, it is in Australia that San Miguel has made its biggest moves.

Initially it was the New Zealand-based milk co-operative Fonterra that expressed an interest in National Foods. Fonterra, with annual revenues of NZ$12bn, is one of the largest milk exporters in the world but it has been keen to use its financial muscle to expand out of NZ-based production.

It first acquired a stake in National Foods four years ago and in October of last year made its move on the company. Then, in December, San Miguel joined the fight and the bidding duel lasted nearly six months.

Eventually San Miguel was forced to up its offer for National Foods from A$5.90 a share to A$6.40, beating Fonterra's bid of A$6.20. Fonterra admitted defeat and sold its 19% stake for an estimated A$250m profit.

Integration and synergies

Fonterra has since said that it will continue to look for Australian growth opportunities. About 10% of its revenue comes from Australia and the company wants to grow this, perhaps with a bid for one of the other main milk producers like Dairy Farmers. It has already taken a 50% stake in Melbourne-based dairy company Bonlac and is currently trying to take that to full ownership.

Meanwhile, San Miguel is assessing how it will integrate National Foods - and also trying to determine what comes next. One rumour doing the rounds of the investment houses in Sydney and Melbourne is a possible deal between San Miguel and the Japanese brewer Kirin. Kirin owns 21% of San Miguel and 46% of Lion Nathan, which makes the beer brands Castlemaine XXXX and Tooheys New.

San Miguel is understood to be keen to grow its beer operations in Australia and it might swap more equity in itself for Kirin's stake in Lion. Then, San Miguel could pull together National Foods, Berri, Lion Nathan and Boags under one umbrella.

Sources close to these companies have pointed out, however, that while this might create a few head office savings there would be few synergies through the rest of the business. National Foods supplies and distributes in a completely different way to Lion Nathan. But, San Miguel is used to operating a conglomerate and it might be less bothered by synergy benefits than other companies.

Cash-rich business

The combination of Lion and National Foods would give San Miguel an enormously cash-rich business in Australia. Even with National Foods on its own, the Philippine company has an opportunity to use the large revenues generated by this type of business to fund further acquisitions in the Asia-Pacific region.

This appears to be the company's strategy and its banker, ABN Amro, hinted as much when one of its corporate financiers said: "It [National Foods] creates a very attractive platform for San Miguel to expand its business."

San Miguel has already started sizing up other potential takeover targets. It has told investors that it is considering taking stakes in both Dairy Foods of New Zealand, which makes the famous Anchor butter brand, and also Singapore-listed Del Monte Pacific, the world's biggest pineapple processor.

Asian powerhouse

However, while using Australia as a base from which to fund expansion into the rest of the Asia-Pacific region might sound good in theory, it could be a lot more difficult.
Much of San Miguel's recent takeover activity has been funded by debt and analysts are wary for this reason. The company's share price is also very high compared with revenues and this too has made foreign investors lukewarm on the stock.

To relieve some of its debt pressures, San Miguel may look at selling 49% of National Foods in the future, although this would probably only provide light relief. The trouble for San Miguel is that it is building itself up as a debt-heavy food and drink conglomerate at a time when these businesses have been struggling globally.

While other companies have been shedding brands to concentrate on core areas and reduce debt, San Miguel is rushing in the other direction. San Miguel's diversification strategy, and in particular the deals it has struck recently in Australia, has set it up as a potential Asian powerhouse. But investors should consider how strong the foundations are before buying into the dream.