As the world witnessed the thunderous fall of Wall Street financial luminaries in the past weeks, one of Philippines' richest families was also painfully letting go of their century-old legacy business.
It was a perfect parallel to the ills besetting the developed and emerging markets. The Americans firms reeled from the aftereffects of hubris lending to individuals with poor credit, while the Aboitiz family, just like many businessmen in Asia, was hit hard by soaring inflation amidst a fiercely competitive industry.
Last September 23, the Aboitiz's holding company signed a deal to sell its shipping and logistics business, Aboitiz Transport System Corp (ATSC), to a competitor who has the backing of foreign investors.
In a statement, holding company Aboitiz Equity Ventures Inc. (AEV) said it has forged an agreement with KGLI-NM, a 60-40 joint venture between local shipping firm Negros Holdings Management Corp. and Dutch company, KGL Investment BV.
The almost P4.7 billion transaction is subject to a due diligence audit
The Aboitizes will be quitting the brick-and-armor side of transporting cargoes and passengers—under its carrier brand, Super Ferry, which provides inter-island sea travel, and 2GO, which offers freight and logistics services—but will retain the service-related aspects, such as providing manpower services to foreign shipping principals.
While the sale only involves a change of hands from one owner to another, nevertheless, it is another illustration of how oligarchs in the country are leaving traditional businesses that have originally bankrolled the evolution of their empires.
"It was a hard decision for us, of course, especially since the business has been with the family for a long period of time. But we had to make that decision and we made it fast because it's what's good for the business over the long term," AEV's chief operating officer, Erramon Aboitiz, told abs-cbnNEWS.com.
When the Aboitizes turn over ATSC to its new owners in January 15, 2009, the latest date to complete the sale, it will mark the end of the Cebu-based family’s ownership and control of the biggest and the first shipping company in the Philippines.
ATSC had its beginnings in 1907, a few years after the first generation of the Aboitiz family who are 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.
Through the last 102 years, ATSC had been in the hands of up to the third and fourth generation of Aboitizes.
The business has gone through rough and tough times—wars, changing political leaders, shifting technologies, globalization. But it was always able to weather these through innovations that kept it in tune with the demands of the times.
What it failed to cope with were the punishing test of prolonged oil prices hikes and the emergence of transportation substitutes, such as budget airlines.
The Aboitiz empire
The Aboitiz family controls the country's second biggest power distribution and generation group, the shipping giant Aboitiz Transport System (formerly WG&A), and Unionbank, one of the country's most profitable universal banks. It has investments in food manufacturing and other industries like construction and property development.
The Aboitiz empire speaks for itself. As of June 2008, total assets of its holding company, Aboitiz Equity Ventures, reached P61 billion. From consolidated half-year revenues of P17 billion, they have generated profits of P2.2 billion.
Through the years, the power generation and distribution business propelled the growth of the entire group. It accounted for 69 percent of the group's bottomline.
The banking arm, Unionbank, contributed 20 percent while the food group accounted for 10 percent.
While the family is doing well in power-related and banking businesses, the same cannot be said of their transportation businesses.
As much as 40 percent of the group's total assets are in their shipping, forwarding, and logistics businesses. Despite these investments, their transportation and logistics business contribute just about 6 percent to the group's overall bottomline.
Shipping is a difficult business. It requires enormous capital: one ship costs between US$5 million and $15 million. And the upkeep is equally daunting. About 50 to 60 percent of total inventory was for fuel and lubricants alone.
Compared to the rest of the business lines, shipping is not as profitable. In the first six months of 2008, it only posted income of P19 million, a whopping 94 percent drop from the previous year's P284 million.
In other words, it was dragging the entire empire.
Major culprit: fuel costs
Erramon Aboitiz said that the company wants to focus on its other core businesses that are expected to provide better returns.
"We felt that if there is a good enough offer for ATSC and that the buyers can grow the business more, then we will let go. We will deploy the sale proceeds to our existing businesses," he said.
Aboitiz admitted high fuel costs greatly affected ATSC. "We've been hurt," he said.
But long before oil prices reached record highs in July 2008, the shipping industry was already bleeding. Continuous double-digit increases in the fuel prices every year since the start of the decade resulted in investment returns of as low as 3 percent.
Fuel costs were partly the reason—aside from mushrooming industry players—that William Lines, Gothong Lines, and ATSC merged their companies in 1995 to form WG&A. Culture clashes among the three families of Chinese and Spanish descent, however, didn't make the merger work. In 2002, the Aboitiz family bought out the two other families and consolidated its lead in the industry.
Shipping, it seemed, is a sentimental business to the Aboitiz family. That was where their conglomerate began. They hung on to the business until it reached a point when it was already too much of a drag to the entire group.
But 2008 became a reckoning year since oil prices skyrocketed. ATSC's costs and expenses jumped 15 percent in the first six months of 2008 largely due to higher fuel and charter-related expenses, thus eroding margins or even the gains from its fuel management efforts.
ATSC chief financial officer Lilian Cariaso told abs-cbnNEWS.com in an earlier interview they were hoping that their value-added services like supply chain management solutions would mitigate losses in their passenger and cargo shipping business, but these services also operate largely on fuel. Travel fare increases of up to 30 percent did not helped either.
From shipping to logistics
Competition not only from other shipping firms but also from low-cost airlines further squeezed ATSC's already thin margins.
Sea-based inter-island transport has been waning since 2005, when overall passengers as recorded by the Philippine Ports Authority, grew by only 2.55 percent. By 2006, sea craft passengers dropped by 8.27 percent. Data for 2007 is expected to show that passenger counts plunged deeper.
To adapt, the Aboitizes adapted a strategy of transforming what was simply a shipping company to a full-fledged logistics and supply chain business that has increasing control of its network.
In 2007, it transformed 2GO from a cargo player to a comprehensive supply chain management provider, which covers the whole range starting from the release of goods—including perishable commodities—from the manufacturer to the delivery of products to customers and their various selling channels.
Freight business now accounts for P3.7 billion of its total P6 billion revenues in the first six months of 2008. The passenger business contributed only P1.4 billion.
ATSC and other shipping companies also converted their vessels to accommodate more cargo than passengers, effectively transforming into the government-backed roll-on-roll-off operations, which meant lower operating costs not only for cargo operators but also serves as substitute for passengers who still could not afford flying.
The budget airline industry has eaten into the first and second-class passengers of the shipping companies.
With such alternative modes of transportation for passengers, the shipping companies' previous plans and investment strategies were thrown out the window. Shipping companies, such as ATSC and Sulpicio Lines, were then modernizing their domestic fleet with bigger and better vessels, some of them even featured spa services, a karaoke lounge, a pool and a game room on board.
Since these investments were not accompanied by more passengers, shipping companies have since reduced their fleet and rationalized their operations to adjust to the changing transportation game.
Positive investor reaction
For quite sometime, news of ATSC's sale has been circulating among players in the local bourse.
Analysts said investors reacted positively to the sale as manifested by the huge jump in ATSC's stock price.
At closing on September 23, prior to the official announcement of the deal, ATS shares soared 39.7 percent or P0.54 to P1.90 per share. If AEV sells the company at the target price of P2.044, it would be at a 4-percent premium over the current market value.
"The sale is a good move because now the Aboitiz group can focus more on its other businesses, mainly on power, which is capital intensive," said Astro del Castillo of First Grade Holdings.
"Demand for power is steady as opposed to the shipping and cargo businesses that are now suffering from high oil prices and little customer appetite," he added.
Del Castillo said ATS's stock would likely trade higher in the coming days ahead of the tender offer to shareholders.
Henry Basilio, a transport expert, explained that "Nothing is added to the industry in terms of additional capacity. However, you now have more dominant players in the industry."
The transfer of ATSC's transport business to the new owners will actually result in the re-incarnation of financially distressed Nenaco Holdings & Management Corp.
Nenaco, which carries the brand name, Negros Navigation, was once the financially bleeding subsidiary of publicly listed Metro Pacific Corporation, which sold its stake to the company's management team in 2004.
Nenaco has retreated from being a major player in the sea transport business after it sold four of its vessels to settle its loans as part of its financial rehabilitation program.
With ATSC under its wing, Nenaco will be the dominant player in the shipping industry with a market share of about 47 percent in cargo and over 50 percent in passenger, Nenaco chairman and chief executive officer Sulficio Tagud Jr. told abs-cbnNEWS.com.
The combined companies will have a fleet of 23 vessels.
Tagud said the Negros Navigation and SuperFerry brands will remain focused on their existing targets, the C,D, and E or the lower class markets. “[They] comprise the biggest portion of our population," Tagud noted.
When the deal is finalized, Tagud said the they will prioritize the integration of the operations and later, a potential expansion, especially of the cargo business. Offhand, Nenaco is already planning to buy two more cargo ships.
The purchase of ATSC's business, however, will also be the entry point of Nenaco's white knight, Dutch company KGL Investment BV., into the local industry.
KGL (Kuwait Gulf and Links) is beneficially owned by the Kuwait-based KGL Investment Co., which in April 2008, invested in an air transportation logistics complex in Clark Field, Pampanga. President Gloria Arroyo attended the groundbreaking event last August.
KGL’s purchase of ATSC is widely expected as part of its strategy to have both air- and sea-based logistics services.
Erramon Aboitiz said it was Nenaco and KGL that approached them for the sale. “We were not looking for a buyer. [But] we agreed because the offer is reasonable." Part of the deal is for the Aboitizes to assist in the smooth transition by staying in their management positions six months to one year.
Aboitiz said ATSC could still be profitable. "There is still growth prospects for ATS when oil prices start to go down." —with reports from Judith Balea, abs-cbnNEWS.com