The next energy powerhouse

Into energy

Which group do you think would be the next dominant energy conglomerate in the medium to long term?

When it comes to power generation, the groups that readily come into minds are the Aboitiz and Lopez groups which have been entrenched in the power industry for generations. With the slew of reforms which was jumpstarted by the Electric Power Reform Act during the Ramos years and continuing to the present, the country has seen new formidable entrants to the power sector which bodes well for the industry and the country.

Which of these groups would come to dominate, or at least become a significant player in the energy sector, has been the topic of speculation by energy watchers.

Ramon Ang of San Miguel Corporation is being keenly watched as he is credited of transforming a stodgy food conglomerate into an energy player. He started by taking over Petron Corporation, and using this as a vehicle, expanded into Malaysia. Next, a huge chunk of Meralco, then some moves into power generation. Now Ang is talking big about upstream oil production.

The other large conglomerates are also suspects. The Ty group through a unit of GT Capital Holdings has been busy acquiring or putting up power assets mostly in the Visayas. The Consunjis have been testing the waters through a power unit of Semirara Mining Corporation. Even the group of Andrew Gotianun through Filinvest Development Corporation is putting up a 600 MW coal plant in Misamis Oriental.

What about--Ayala Corporation?

As of now, that might raise eyebrows as the group is better known for its iconic master planned property developments and banking (through Bank of the Philippine Islands). But since then, it has successfully branched into telecoms which gives the dominant carrier a run for its money, and water service.

Judging from its recent  pronouncements and actions, the group seems determined to stamp its mark in the energy industry.

At the recent stockholders' meeting, Eric Francia, the president of AC Energy Holdings of the Ayala group, revealed that the company has already committed US$325 m for four power projects already acquired or in advanced stage of development. The amount is part of the $700 m earmarked for upcoming power projects in the next few years.

Ayala debuted into energy a few years back by acquiring a 50% stake of 33 MW Bangui wind project from the original developers. At present, the group's equity interests in projects include a 20% of GNPower which is developing a 600 MW coal plant in Bataan; two 135-MW coal plants in Batangas in partnership with Trans-Asia Oil and Energy Development; and a mini-hydro project somewhere in Luzon.

These could represent just a start.

“Our strategy of record for AC Energy is to have a combination of conventional (or fossil-fuel) and renewable energy resources,"  Francia explained, which summed up a strategy combining reality to have conventional power sources together with renewables and hard-nosed business acumen which Ayala is renowned for.

That's why, according to Francia, the group leans towards competitively-priced conventional sources, but over time it sees a balanced portfolio of conventional and renewable sources. But that should take time. That makes sense.

Given its track record on other businesses by taking a long term view, the Ayala group cannot be ruled out as a dominant energy player, even if it has no previous record. When it acquired a small telecommunication outfit named Globe-Mackay, it had no telecom experience, but nevertheless transformed it to second-largest telecommunications firm GlobeTelecom. It acquired a much maligned government water service unit and developed it to a reliable--and profitable--service provider Manila Water Corporation despite having no prior exposure to the water distribution business.

Most importantly, it has the necessary capital firepower to undertake costly projects like power generating plants.

The oldest conglomerate may yet turn out to be the youngest dominant power player.

Will SMC make a run for Bumi Resources?

Speculation is rife within the energy and investment circles whether San Miguel Corporation (PSE:SMC) is keen on taking a stake at Indonesian coal miner Bumi Resources, by buying the 35% stake owned by PT Bakrie & Brothers, which hopes to raise some $1.3 billion to pay off debts.

 In a disclosure yesterday, SMC said it would bid for 35 percent of Indonesia's largest coal miner rivalling an offer led by private equity firm Indonesian-based Northstar Pacific which is run by by former Goldman Sachs banker Patrick Walujo and has a joint venture with U.S. private equity firm TPG Capital LP. The tone is somewhat different than its earlier disclosure that it will initiate talks with Indonesia’s PT Bakrie & Brothers, for an alliance for its PT Bumi Resources operations.

 Apparently, SMC is dragged into a bidding war when a Bloomberg report said PT Bakrie & Brothers, the investment arm of Indonesia’s richest family has agreed to sell its stake to Northstar Pacific.

 The sources said Indonesian investment bank PT Renaissance Capital might also join the Northstar consortium or bid separately.

 PT Bumi Resources Tbk is an Indonesian-based natural resource company engaged in mining, oil, gas and energy-related activities. It owns the world’s largest export coal mine with operations in East and South Kalimantan with 11 billion tons of coal mineable reserves; about 55 million tons in average sales volumes in the last three years; and, a steady cash flow generation, according to the SMC disclosure. 

SMC will be like a salmon swimming upstream. It is pitted against a deep-pocketed bidder in Northstar consortium. Worse, its main rival is politically highly connected to the powers that be, and in Indonesia, business and politics are inextricably intertwined.

 One of the Bakries, Aburizal Bakrie, is Indonesia's chief social welfare minister and an influential figure in the Golkar Party, which is a key part of President Susilo Bambang Yudhoyono's coalition. Bakrie is considered the country's richest man, with an estimated $9.2 billion fortune.

But will SMC, like the salmon, go against the flow to seed its investment eggs in a fertile new territory?

SMC has declared as far as two years back of its intention to enter into high growth areas which include energy to prop up its bland returns from its food businesses. It has fired an opening salvo by acquiring a 27 percent of the country's largest power distributor Manila Electric Co (PSE:MER) in a cash deal worth 30 billion pesos ($612 million), with payments spread out over three years from the Government Service Insurance System (GSIS).

Indonesia as a target area fits very well into SMC’s sphere of influence. It has a sizable food and beer business there; it can leverage that experience to its new intentions.

Indonesia is also a fertile ground for energy investments as we noted earlier, notwithstanding the difficult environment one has to face.

 In a sense, SMC knows very well where the mother lode is likely to be hidden. SMC may face enormous obstacles in its run for Bumi. It may fail altogether. But one has to give credit for SMC for its tack to grow its business despite the lingering global financial crisis.

 It is boldness, which can be mistaken for brashness, worth emulating by other local big business groups who are merely content to keep their ongoing concerns here. In a highly globalized environment, rules have changed, and only those who are adept at playing by the new rules are bound to survive and prosper.

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UPDATE: November 30, 2008: On November 28, Indonesian private equity firm Northstar Pacific said it will assume  a "significant" chunk of the $1.2 billion owed by the diversified Bakrie group and will convert it into shares in Bakrie's coal firm, Bumi Resources. This could give Northstar a substantial stake in Bumi, Indonesia's biggest coal miner, while providing a much-needed lifeline for the indebted Bakrie & Brothers, the parent firm. No mention of any other interested party on Bumi was made in the report.