ANALYSIS: With San Miguel, PAL tie-up, will beer war reach the skies? means BUSINESS

MANILA, Philippines - The entry of San Miguel Corp. into Philippine Airlines (PAL), run by staunch competitor in the beer business, the Lucio Tan Group, poses some intriguing prospects: Will their odd coupling extend beyond operating an airline or will they continue their bitter rivalry in the local liquor and beverage space?

At first, one may think that the LT Group is an avid student of Sun Tzu, practicing a key tenet of the “Art of War,” which is to keep one’s enemies closer.

To recall, LT Group’s Fortune Tobacco Corp. struck an unlikely alliance with erstwhile competitor Philip Morris Philippines Manufacturing Inc. two years ago to cerate a de facto monopoly in the local cigarette market. The tobacco giant has so far been successful in blocking sin tax reforms. In highly taxed and regulated industries, it pays to join forces with rivals.

Now comes San Miguel's "rescue" of the beleaguered flag carrier, which requires deep pockets to finance its expansion, face court battles with a combative labor union, hurdle escalating fuel prices and fight off a growing number of low cost-carriers that have given the flag carrier a run for its money.

After three months of courtship and bargaining, San Miguel and the LT Group finally sealed the deal on April 4, giving the diversifying food-and-beverage conglomerate a 49-percent stake in Asia’s oldest Airline for $500 million.

San Miguel, which started as a brewery in 1890, has been paring down its stake in core businesses to finance its entry into heavy industries. It has given partner Kirin Brewery Co. Ltd. a 49.4 percent interest in San Miguel Brewery Inc. (SMB), as the Japanese beer-maker seeks a steadier foothold in Asia.

'Bitter' beer war

San Miguel has been the undisputed leader in the Philippine beer market, but its most credible challenge has come from the LT Group, which in 1982 put up Asia Brewery Inc. and in 1988 launched "Beer Pale Pilsen" in an attempt to ride on the popularity of "San Miguel Pale Pilsen."

“San Miguel tried to obliterate it—the beer war was bitter,” said James Lago, PCCI Securities Brokers Corp. head of research.

San Miguel sued Asia Brewery for copyright infringement. After a series of lawsuits and counter suits, Asia Brewery lost and was forced to change the name of its flagship product to "Beer na Beer."

Then came a series of beer “taste-test” ads, taking off from a tack taken by soft drink competitors Coca-Cola and Pepsi.

“But Asia Brewery is still here and the LT Group is proud that it was able to withstand San Miguel’s efforts to kill Beer na Beer,” Lago said.

With San Miguel doing PAL a favor by helping the flag carrier with its finances, is a brewery partnership looming on the horizon?

“I’m not too sure whether it’s part of their strategy,” said Jomar Lacson, Campos, Lanuza & Co. head of research.

“But it makes sense for rivals. It would maximize their capabilities and secure their market share, such as in the case of cigarettes,” he said.

However, it would not be easy for such an alliance given that the management structures of the two breweries are different, with San Miguel in a strategic partnership with Kirin and Asia Brewery tied up with Carlsberg, among other foreign players.

Tie-up beyond PAL unlikely?

According to PCCI Securities’ Lago, San Miguel turned down Carlsberg's venture in the Philippine market so the foreign firm tied up with Asia Brewery. The Carlsberg beer was the first product Asia Brewery launched before it came up with its Beer na Beer.

Asia Brewery later took in Coors Brewing Co. and introduced their premium strong beers to the Philippine market.

In the meantime, the court battles between the two Philippine beer makers brewed on, with Asia Brewery accusing San Miguel of hoarding millions of Beer na Beer bottles and crates to disrupt its rival's supply chain.

A lower court ruled against San Miguel, but the Court of Appeals overturned this decision and ordered Asia Brewery to compensate its rival for the negative publicity the lawsuit created. 

“To think of the two tying up—that would be a strange marriage, indeed. They fought tooth and nail in the beer space. There is a thick line in the sand,” Lago said.

Jose Vistan, AB Capital Securities Inc. senior research manager, said a tie-up beyond PAL is unlikely.

“I can’t imagine a partnership between San Miguel and Asia Brewery. It may be possible but as of now, San Miguel’s interest is only PAL. They will continue with their own endeavors with their own breweries,” Vistan said.

“However, there are potential synergies like Petron supplying fuel for PAL. San Miguel Pure Foods supplying PAL catering and so on. Then there is San Miguel’s quest for airports—which makes sense for PAL,” he added.

San Miguel has deep pockets and the new capital it would bring to the two Tan-owned carriers - PAL and Air Philippines Express - would allow these to undertake a re-fleeting program, improve services and offer affordable fares. 

This would then give the flag carrier a beefier war chest now that the battle in the skies is heating up.

Hard liquor makes sense

If a partnership between San Miguel and Asia Brewery were out of the question, it may be a different case when it comes to the hard liquor units of the two conglomerates, Lago said.

Ginebra San Miguel Inc. (GSMI) and the LT Group’s Tanduay Distillers Inc. share the liquor market with Andrew Tan’s Emperador Distillers Inc. and Distelleria Limtuaco.

“The market is fragmented. Tanduay is strong in the Visayas and Mindanao regions while GSMI and Emperador are strong in Luzon,” Lago said.

It would then make sense for GSMI and Tanduay to have some kind of partnership to create efficiencies that would help bring costs down and allow them to face the onslaught of cheap imported spirits.

Last year, the World Trade Organization ruled against the Philippine taxes on imported alcoholic drinks, a result of the complaint lodged by the European Union and the US.

“If Johnny Walker becomes P400 and the equivalent local spirit is P300, then people may just go for the imported one. And that is something to think about,” Lago said.