New laws in the Philippines are expected to support mergers and acquisition (M&A), which declined in 2022 to $8.1 billion in value for 33 deals from $9.961 billion in 2021, as companies capitalize on this strategy to expand and grow their business, according to consultancy firm PwC Philippines.
The PwC M&A year-end report titled “The year that was: Major deals in 2022”, as represented in the Philippines by Isla Lipana, provides an overview of the M&A landscape in the Asia-Pacific and Southeast Asian regions. It highlights the major trends in M&A activities in the region, particularly in the Philippines. The report also discusses the future M&A outlook in the Philippines in 2023, emphasizing how the changing regulatory landscape may present opportunities for companies and the country.
The report cited Retail Trade Liberalization Law, Foreign Investment Act, and Public Service Act as new laws that will further drive foreign investments in the country.
These laws promote the creation of foreign companies, increase foreign investment and the creation of public service companies, encourage Public-Private Partnerships (PPP), create balance in the M&A ecosystem, emphasis on ESG reporting and sustainable financing, and promote the creation of foreign companies.
For instance, the amendments in Republic Act (RA) 11595, also known as the Retail Trade Liberalization Law, reduce the minimum paid-up capital requirements for foreign retail enterprises from P30 million to P25 million. The law also removes the requirement for a certificate of pre-qualification to the Philippine Board of Investments and lowers the investment requirement. From having a minimum investment of $830,000 per store, a registered retailer engaged through more than one physical store is now required to have approximately $200,000.
The changing regulatory landscape may also present opportunities for companies and the country. As some amendments promote foreign investments in the country, these also allow full foreign ownership of certain companies in selected industries, according to the report.
Dealmaking in the country will continue to be driven by both public and private companies. As the Philippine economy continues to open, post-pandemic acquisition opportunities are anticipated to take place for private companies. Public company takeovers will continue to be mostly negotiated and contractual for some acquisitions of stakes in listed companies.
Sectors in the Philippines that are expected to enjoy higher investor confidence in emerging industries include telecommunications, renewable energy, insurance, logistics and agriculture, the report said. With the expanding 5G connectivity, major companies will continue commercializing their assets to fund network expansion plans.
The Philippines is estimated to require up to 4,000 new towers every year according to independent operator EdgePoint Infrastructure. Renewable energy firms, on the other hand, are expected to further increase their investments in alternative energy because of the country’s moratorium on coal plants and the declining sources of coal.
Foreign investors have also eyed the insurance industry, with the recent discussions between the Philippine Insurers and Reinsurers Association (PIRA) and companies representing capital firms from Korea, Thailand and Japan. With the incoming increase in the minimum capital requirement changes from P900m to P1.3 billion, PIRA has noted that M&A has become a major option for some insurers who will be unable to comply.
In the logistics sector, the market is expected to reach P1 trillion by 2024 driven by the government’s plans to expand the logistics capacity in the country. Such plans include the National Logistics Strategy, which has mapped out 455 priority infrastructure projects in the private sector for the industry. Dealmakers will also seek investments in agriculture following the emergence of agribusinesses and agricultural innovations, such as data-driven farming and automation.
Amid the rising inflation rate, food security issues and continuing geopolitical concerns, the Philippines is expected to grow gradually next year. The country’s growth will be driven by the amendments made by the government to further attract investments, initiatives from the government and national agencies to support the public and private sectors, and improvement of the business framework to align with international standards.
Other notable sectors in the country that are seeing sustained growth in M&A activities include power & energy, transportation, real estate development, and industrial manufacturing.
The high number of activities in these sectors were driven by the shift from coal to renewable energy (RE), as well as the impact of rising oil prices and other related raw materials. With the country’s moratorium on coal plants declared in 2020, Philippine companies have since directed their investments in developing and innovating RE projects.
Earlier this year, SM Investments Corporation (SMIC) entered the RE market through the 81 percent acquisition of Allfirst Equity Holdings Inc. for US$306mn. The deal is as part of the company’s commitment as a catalyst of development in Filipino communities.
The report also cited the positive outlook of the government and businesses for the upcoming year.
“With the current changes in regulations, deals with foreign investors are expected to increase. More businesses will be leaning towards sustainability practices as more consumers are now aware of the importance and benefits of being sustainable. As the situation in the Philippines slowly goes back to normal, businesses will continue to normalize their operations and pursue their expansion plans,” the report added.
The recent disruptions brought about by the pandemic have taught companies to be adaptable and resilient. “They have also shown us the growing importance of dealmaking in order to survive and thrive during challenging periods. To remain relevant and stay ahead of the competition, businesses need to consider how they can reinvent their operations, products and services,” it added.
With that, M&A activities will be a crucial factor in this transformation as they enable business to innovate and achieve exponential growth.
For 2022, the PwC report said that deals in the Philippines came from China, Japan and other Southeast Asian countries. About 33 of such deals were announced as of December 2022, with local and foreign investors primarily taking notice of the economic recovery of the service sector in the country.
The report also cited the exit of the company’s Philippine consumer banking arm and Citicorp Financial Services & Insurance Brokerage Philippines, Inc, which were acquired by Union Bank of the Philippines for P72 billion as announced in 2021. The purchase price includes the net asset value of the business at P26.7 billion, plus a premium of P45.3 billion. Citigroup’s consumer banking business in Taiwan, on the other hand, will be acquired by Singapore-based investment company DBS Group Holdings Limited for $3.4 billion.
While several businesses redirected their focus, other companies made acquisitions to complement their current business portfolio. The investment arm of Philippine conglomerate San Miguel Corporation, San Miguel Equity Investments, Inc., announced in October 2022 the acquisition of Eagle Cement Corporation, which will expand its current cement business. With a deal size of $1.9 billion, the transaction is the highest-valued deal in the Philippines for 2022.
The Philippines remains one of the more robust countries for dealmakers. The country ranked 83rd in the 2022 Global Opportunity Index — a report that measures the country’s investment landscape. Investors seem to be drawn to the Philippines’ resilient service-centered economy and strong domestic demand.
Deals in the Philippine tech and telecom sectors include five of the largest M&A acquisitions of the year, involving telecom giants Smart Communications, Inc. (Smart) and Globe Telecom, Inc. (Globe). To reach its goal of having 1,500 new towers in the coming years, Smart agreed to sell and lease back its 5,907 towers for US$1.5 billion. The asset deals include transactions with Axiata Group Berhad and edotco Group Sdn Bhd for $800 million, as well as with DigitalBridge Group, Inc. and EdgePoint Infrastructure for $667 million.
Globe, on the other hand, will also sell and lease back its 7,059 towers for $1.6 billion to PhilTower Consortium Inc., Frontier Tower Associates Philippines, Pinnacle Towers Pte Ltd., and Miescor Infrastructure Development Corp. Proceeds from the separate transactions will help fund Globe’s network expansion program.
While most industries struggled due to supply chain disruptions, financial institutions were mostly immune as their business operations are less dependent on affected commodities, such as oil and minerals. Investor confidence in the sector has grown within the year as the government-initiated reforms to help improve the regulatory framework of the banking, insurance and trust industries. A notable deal is the US$465mn investment of Sumitomo Mitsui Financial Group, Inc. and Sumitomo Mitsui Banking Corporation in Rizal Commercial Banking Corporation (RCBC). The transaction was a part of RCBC’s plan to expand in key customer segments and fund its investments in digital technology, cyber security and human resources.
The acquisition of the 100 percent stake in HC Consumer Finance Philippines by MUFG Bank, Ltd., Mitsubishi UFJ Financial Group, Inc., and Bank of Ayudhya Public Company Limited is also one of the major deals this year. With a deal value of $423mn, the transaction will strengthen MUFG’s business in Southeast Asia through a collaborative approach with partner banks.
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