The Asian Financial Crisis did not merely humble the conspicuous losers. It also forced one of Philippine business’s eventual winners into an extended and rather unsentimental workout: raise equity, sell what can be sold, renegotiate what cannot, and, if necessary, surrender even the trophy asset.
In Philippine business memory, the aftermath of the 1997–98 Asian Financial Crisis is often told through the ordeals of the most visible dynasties and the most politically charged conglomerates. Yet the period was just as revealing for another camp: the First Pacific–Metro Pacific group led in the Philippines by Manuel V. Pangilinan. The group did not implode. But it most certainly bent. Metro Pacific Corporation (MPC), then First Pacific’s Philippine flagship outside PLDT and a few other holdings, suffered a genuine balance-sheet squeeze as the peso weakened, interest rates rose, and foreign-currency borrowings suddenly looked less like clever leverage than an expensive misjudgment. In 1997, Metro Pacific’s consolidated net income fell 16% to ₱713m from ₱844m, with roughly ₱418m of foreign-exchange losses on U.S.-dollar working-capital lines; its debt-to-equity ratio rose to 1.45 times, prompting an urgent move to recapitalize.
The first response was not romance but arithmetic. In 1998, Metro Pacific moved to raise fresh capital on a scale that left no doubt about the stress it faced. It first enlarged the proposed rights issue from ₱14bn to ₱20bn, then set terms for a ₱20bn new-share offering, saying the proceeds would be used to retire head-office debt, much of it foreign-currency denominated. Even after this, financing charges in the first half of 1998 swelled to ₱1.152bn from ₱150m a year earlier, reflecting the consolidation of Smart and Fort Bonifacio, heavier indebtedness, and a harsher interest-rate environment. The fresh equity helped: Metro Pacific said the capital raising had been used to extinguish foreign-currency obligations and improve leverage, bringing debt-to-equity down to 1.05 from 1.45. Still, the conclusion was plain enough: capital raising alone would not be sufficient. Assets had to go.
Thus began a disposal program that, in retrospect, reads like a catalog of a conglomerate learning to live without its ornamentation. Some of the trimming had started before the worst of the crisis. In 1997, Metro Pacific booked gains from the disposal of Philippine Cocoa Corporation, one of the earlier signs that management was willing to cash out non-core businesses when necessary. By 1998, it had also sold Holland Pacific Paper, Inc., a tissue and toilet-paper business, laying the groundwork for a more concentrated retreat from consumer and industrial sidelines. These were not yet transformative deals; they were the first concessions to a new age in which liquidity mattered more than diversification.
The disposals then became more purposeful. In December 1998, Metro Pacific’s packaging arm, Steniel Manufacturing Corporation, sold its remaining 60% stake in Starpack Philippines Corporation to VAW Europack for ₱700m. Metro Pacific said bluntly that the proceeds would be used to pay down debt. This was not the language of portfolio refinement. It was the language of a group under instructions from its own balance sheet. The sale followed the earlier disposal of Holland Pacific Paper and the 1997 exit from Philippine Cocoa, forming a discernible pattern: businesses that could be sold quickly and at tolerable prices were being converted into debt service.
The year 1999 brought the more substantial pruning. In February, NTT agreed to raise its stake in Smart Communications, buying about US$42m of Smart shares from Metro Pacific and subscribing for new shares, which diluted Metro Pacific’s economic interest to roughly 38%. By November, the company would describe the transaction as a partial sale of Smart that had brought in about ₱1.6bn and helped drive the year’s exceptional gains. Smart had once represented future scale; under post-crisis disciplines, it became a source of balance-sheet relief. The transaction, First Pacific said at the time, would bolster the balance sheets of both the parent and Metro Pacific.
Then came the consumer disposals. In May 1999, Metro Pacific agreed to sell Metro Bottled Water Corporation, maker of Wilkins Distilled Water, to La Tondeña Distillers for about ₱1.2bn. The proceeds, it said, would be used to reduce head-office debt. In July 1999, it sold Metrolab Industries, producer of Eskinol, Block & White, and other skin-care staples, to Sara Lee Philippines for ₱1.02bn, again saying the proceeds would go to reduce head-office debt. These were not marginal labels. They were established consumer franchises. But they were also liquid, monetizable assets, and in a deleveraging cycle, liquidity outranks sentiment. By August 1999, Metro Pacific itself published a summary of disposals from 1998 to mid-1999—Holland Pacific Paper, Starpack, Smart (partial), Wilkins, and Metrolab—with gross proceeds of roughly ₱4.6bn. It said these disposals, together with ₱3.4bn of new equity, had helped cut consolidated liabilities by 14% to ₱43bn and reduce debt-to-equity to 0.57 from 0.71 at end-1998.
The rhetoric of “refocusing” was, by then, scarcely camouflage. Metro Pacific was becoming a property company because it had sold so much else. In its November 1999 nine-month results, the company said the year’s growth in net income was largely attributable to non-recurring gains following a series of asset disposals, specifically the partial sale of Smart, the sale of Wilkins, and the sale of Metrolab. More importantly, the balance sheet had begun to look less distressed: total liabilities fell 22% to ₱40.6bn, interest-bearing obligations fell to ₱20bn, and the debt-to-equity ratio improved to 0.54 from 0.71 at the end of 1998. Another ₱4.1bn of equity raised that year was used primarily for debt reduction. The group was still under pressure, but it was no longer in denial.
What remained, however, was the grandest asset of all: Fort Bonifacio. Before the crisis, it had been easy to regard this former military base—through Bonifacio Land Corporation (BLC) and its operating vehicle, Fort Bonifacio Development Corporation (FBDC)—as a generational prize. After the crisis, it looked more ambiguous: a vast, prestigious, capital-intensive project with long-dated payoffs and obligations that weighed on the parent company’s flexibility. Metro Pacific’s first move was not to sell it outright, but to restructure it. In October 1999, FBDC agreed to return a 64-hectare portion of the project to the government’s Bases Conversion Development Authority. In return, BLC no longer had to pay the ₱8.8bn it still owed from the original project bid, and FBDC would receive other plots and assets worth about ₱1.1bn. First Pacific said the deal would reduce BLC’s debts from ₱13.7bn to just below ₱5bn. It was a striking admission that the flagship itself had become part of the debt workout.
Even that proved only a partial remedy. In 2000, Metro Pacific continued the retreat from whatever was not obviously central. It sold Metrovet, a distributor of animal-health products, to Agribrands Animal Health for close to ₱100m. Later that year, it sold its 72.6% interest in Steniel Manufacturing to CVC Asia for ₱425.5m, saying part of the proceeds would go to retire debt and that, after the sale, property assets would account for about 93% of Metro Pacific’s resources. Telecom holdings, too, were rationalized. After Metro Pacific’s remaining 38.3% interest in Smart was exchanged into an 8% stake in PLDT in March 2000, First Pacific agreed in July 2000 to buy that 8% PLDT stake from Metro Pacific for US$274.9m (about ₱12.1bn). Metro Pacific said the proceeds would support its balance sheet as it moved towards becoming a pure property company. By November 2000, it said the PLDT divestment had generated a net gain of ₱5.7bn, cut consolidated interest-bearing obligations, and improved debt-to-equity to 0.37.
In the end, Fort Bonifacio itself could not remain exempt from monetization. In June 2001, Metro Pacific said BLC planned to sell the development rights to the 18.9-hectare Northern CBD of Bonifacio Global City, explicitly saying the transaction would strengthen the balance sheet. By October 2001, management was blunter still: Metro Pacific’s main objective, it said, was to reduce debt to a size supportable by ongoing operations, and that might require selling “substantial pieces of property” in the Global City, even a “significant or controlling interest” in the project. A month later, First Pacific announced that Metro Pacific had decided to offer for sale its entire 69.6% interest in BLC, whose proceeds were expected to repay a US$90m loan and meet other debt obligations. Finally, in 2003, First Pacific said shareholders had approved the sale and assignment of that US$90m Larouge loan together with the pledged 50.4% shareholding in BLC to Evergreen Holdings and Ayala Land. The loan had fallen due in 2001 and remained unpaid. The flagship had not merely been trimmed. It had, in effect, been mortgaged, marketed, and then relinquished.
Seen from a distance, the eventual rebirth of the group as Metro Pacific Investments Corporation can make the period look orderly, even strategic. It was certainly strategic in the sense that every disposal served a purpose. But it was also a long act of necessity. Metro Pacific’s crisis-era story was not one of elegant rotation from old to new sectors. It was one of forced liquidity, in which a company sold packaging, paper, cocoa, water, cosmetics, veterinary distribution, telecom stakes, a shipping-linked packaging arm, and, eventually, control over the most glamorous urban land bank in the country, all so that debt would cease to dictate every strategic conversation. The group survived not because it was spared the crisis, but because it accepted the post-crisis disciplines earlier than memory now allows.
We’ve been blogging for free. If you enjoy our content, consider supporting us!
Disclaimer: This is for informational purposes and is not investment advice. Figures are taken from company disclosures and exchange data; valuation ratios include the author’s calculations based on cited inputs.
Comments
Post a Comment