Aboitizes almost bade shipping business goodbye

By Lala Rimando, abs-cbnNEWS.com/Newsbreak

Posted at Sep 07 2009 07:11 PM | Updated as of Sep 08 2009 06:20 AM

MANILA - The fact that the Aboitiz Group remains to be the owner of the ill-fated Superferry 9 vessel is a testimony of how the global financial crunch has hit one of the country’s biggest capitalists.

Almost a year ago—September 23, to be exact—the Aboitiz Group was poised to exit the inter-island ferry business.

Several renegotiations after—in terms of purchase price, financial terms, size of stake—the buyer, a Filipino-Kuwaiti joint venture, called the deal off.

The buyer cited "current constraints in the debt markets" as the reason for its decision. (Read: How the sale of Aboitiz's transport business went kaput )

At the time, the financial markets were just starting to unfreeze in the aftermath of the thunderous fall of financial giants AIG, Lehman Brothers, and others that came after.

The road to April 30

When the Aboitiz Group announced on September 23 that they are selling their stake in Aboitiz Transport Service Corp. (ATSC, formerly WG&A), the deal was marked as a milestone in Philippine business.

ATSC had its beginnings in 1907, a few years after the first generation of the Aboitiz family, who were migrants from northern Spain, settled in central Philippines. Ramon Aboitiz then bought the first vessel, a two-engine steamer, to transport abaca from Visayas to Manila.

For over 100 years, ATSC had been in the hands of up to the third and fourth generation of Aboitizes. Under ATSC are its carrier brands, SuperFerry, which provides inter-island sea travel; SuperCat, which offers fast craft passenger travel, and; 2GO, which offers freight and logistics services.

ATSC’s owners are the 2 holding companies of Aboitiz family, Aboitiz Equity Ventures (AEV), the publicly listed firm, and Aboitiz & Co. (ACO), the private parent firm.

Both AEV and ACO were willing to sell all of their stakes in ATSC to KGLI-NM Holding Inc., a 60-40 joint venture between local shipping firm Negros Holdings Management Corp. and Dutch company, KGL Investment BV.

Erramon Aboitiz, president and CEO of AEV, said the buyers initiated the talks for the sale.

The deadline of the sale was initially November 22, 2008. This was moved to December, then eventually, April 30.

The terms of the transaction also changed. From buying 93% of ATSC, the buyers renegotiated to buy only 49%, which was eventually whittled down to 32%.

This meant the original P4.7 billion that the Aboitiz Group was expecting was significantly reduced to P1.46 billion.

By reckoning date, on April 30, almost 130 days before SuperFerry 9 sank, the deal was called off.

What could have been a way out of a difficult and financially straining business for the Aboitizes was hit by the financial debacle worldwide. Despite the reduced transaction price, the buyers still found raising capital difficult.

Timeline: How the sale of Aboitiz's transport business went kaput
By Lala Rimando, abs-cbnnews.com/Newsbreak

MANILA - Before SuperFerry 9 sank on Sunday, its owner, the Aboitiz Transport Service Corp (ATSC) was supposed to have been out of the hands of the Aboitiz family already.

Below is the timeline of the botched sale.

2007

- Underwent an asset rationalization program to mazimize use and profitability of the vessels.

- Converted the vessels to carry more freight (for high paying cargos) instead of passengers.

- Adopted a low-cost carrier business model for its passenger business to compete with low-cost airlines. This involved sending off vessels to sail more often, tapping internet and other low cost distribution and sales channels, tiered pricing with very low rates, etc. 

2008

September – Aboitiz Equity Ventures (AEV, public holding company) and Aboitiz & Co. (ACO, private holding company) accepted the unsolicited offer of KGLI-NM Holdings, Inc. to buy 93% of their shareholdings for P2.044 per share or about $100 million. KGLI-NM is a 60-40 joint venture between local shipping firm Negros Holdings Management Corp. and Dutch company, KGL Investment BV. The buyers have until Nov. 22, 2008 to notify the selling parties whether it will proceed with the transaction, after which a definitive share purchase agreement will be executed on or before Jan. 15, 2009.

November - KGL-NM requested to extend its due diligence review period by one more month or until December 19, 2008.

December – AEV and ACO have agreed to renegotiate an earlier deal with KGLI-NM Holdings Inc. for the latter to buy 42% from the Aboitiz group and the public's 7% via a tender offer later. Both purchases will be done at P1.84 per share, 10% lower than the original offer, giving the Aboitiz group about P1.9 billion. "The financial markets have changed since they (KGLI-NM) made the offer," Erramon Aboitiz, Aboitiz chief operating officer told reporters by phone. "They asked for more time to fix their finances." The 49% ownership is broken down as follows: 35% from AEV, 7.2% from ACO and 6.8% free float. Transaction closing is expected on or before April 30, 2009. 

2009

March 31 – AEV and ACO received from KGLI-NM a notice that the latter has decided to exercise its option to acquire 32% stake (from previous 49%) by end-April. The new deal involves 790.8 million shares of ATS priced at P1.84 per share, or equivalent to P1.46 billion. In a statement, AEV said that "the actual number of shares to be acquired by KGLI-NM will be determined based on the dollar exchange rate on closing date, which is expected to occur on April 30, 2009."

April 30 – KGLI-NM informed AEV and ACO that it will not proceed with the purchase of the ATS shares, citing current constraints in the debt markets as the reason for its decision. Previous agreements were terminated and the P100 million option money paid by KGLI-NM to AEV and ACO (P82.88 million for AEV and P17.12 million for ACO) was deemed forfeited.

Shipping vs flying

The heydays of the shipping business are gone.

In an archipelagic country like the Philippines, the shipping transport industry used to play an important role in the country’s development. Bulk of domestic trade was transported by shipping, while passenger travel was largely dependent on commercial vessels.

The changes in the inter-island transportation were not due to competition among passenger liners themselves. The threat came from substitutes.

Budget airlines, led by local carrier Cebu Pacific, dramatically dropped their fares for various domestic destinations by reducing turnaround time, thus increasing per-plane utilization.

In other words, their planes were up in the air most of the day, which meant more revenue per passenger. They also reduced operating cost by removing traditional freebies, such as complementary food. They computerized ticketing and offered lower fares for early bookers.

The annual record increases in airline passengers did not only account for new—and more frequent—inter-island hoppers. It also meant passengers who were on budget and considered flying a luxury now have an alternative mode of transport.

Flying budget airlines is not only more affordable now, it is also more convenient. A Manila-Cebu boat ride, for example, takes almost a day. A plane ride, on the other hand, takes just over an hour.

Depending on the season and timing of purchase, a round trip plane fare between Manila and Cebu could go as low as P2,000. In the past, round trip inter-island ferry fares on the same route hovered between P4,000 to P8,000.

ATSC, too, tried to play the budget travel game. In 2007, it copied the business model of the budget airlines—sending off vessels to sail more often, tapping internet and other low cost distribution and sales channels, tiered pricing with very low rates, etc.

But even at reduced roundtrip rates of up to a little over P1,000, the small difference with the cost of flying have not enticed some to convert.

Richard Pinkham, a Singapore-based aviation expert previously with the Center for Asia Pacific Aviation, previously explained to abs-cbnNEWS.com/Newsbreak what this means to the customers: "If you can lure a new passenger onto an airplane with a super low fare, then it will be harder for that person to accept a long ferry ride in the future. They may return to the airplane even though the price has gone up."

Ferries vs Roro

To adapt, shipping companies converted several of their passenger-cargo lines to accommodate more cargo than passengers.

This meant going head-to-head with another competitor: the government-backed roll-on-roll-off (RORO) operations. It resulted in lower operating costs not only for cargo operators but also as another substitute for passengers who still could not afford flying.

Roro is less expensive for those involved in the cargo business because of its multi-port approach. For example, a Roro boat that leaves the Batangas port can pass by various smaller islands, such as Mindoro and a few more islands, which are not traditionally serviced by other big boats because business there used to be not as brisk as, say the likes of Cebu, Iloilo, Davao and Cagayan de Oro, where there are more commercial activities.

Roro, which was launched in 2003, has since led to changes in areas and islands that used to be left behind in terms of economic development.

In an earlier interview, Henry Basilio, a transportation expert from the University of Asia and the Pacific, said cargo traffic for Roro vessels in 2003 was only at 30,000 metric tons. He said this has since increased exponentially to 240,000 metric tons last year.

Basilio explained that Roro is also cost competitive for passengers. Roro vessels carried only 130,000 passengers in 2003, and has since skyrocketed to about 700,000 passengers in 2007.

"The winner in this case is the riding public. The competition not just among the shipping liners’ peers but from other modes of transport as well," Basilio said.

Passengers are gravy

Shipping companies which ply longer inter-island distances, such as Manila-Cebu and Cebu-Zamboanga, among others, are traditionally not dependent on revenues from passengers alone.

"Passengers are just their gravy," Basilio said. "They [shipping companies] really earn their dough from their cargo business."

These liners derive about 70% of their revenues from cargo and about 30% from passengers, Basilio explained.

Historically, ships carry passengers onboard because it translates to scheduled departures and specific routes, elements that assure a cargo client that he could plan and manage the movement of his goods.

This 70:30 ratio is almost similar to that of long-haul commercial passenger airlines, which also carry cargoes in their bellies. Electronic shipments are particularly sensitive to delivery timing, since electronic companies require limited transportation lead time from the port of origin to their destination.