Strong economic fundamentals and rapid growth demand from an increasingly affluent population are expected to attract more merger and acquisition (M&A) activity to the Philippines as political uncertainties surrounding the current administration have eased, say analysts.
Spurred by an uptick in government and consumer spending, an upturn in deal-making is seen as imminent amid rising interest rates in the Philippines. Companies continue to seize opportunities to tap a growing market in the country where gross domestic product (GDP) expanded by 6.5% in the second quarter of this year.
The growth rate trailed only China's 6.9% in the Pacific region and surpassed that of neighbours including Vietnam and Thailand. The upturn in large part reflects growth of 7.5% in government consumption and 5.9% in household spending, according to a report by the corporate strategy consulting firm Solidance.
Per capita GDP rose by 5% in the same quarter, while the population expanded to 104.3 million from 101 million in 2015, it added.
"Domestic and inbound deals are expected to target sectors related to consumption, such as food and beverages, healthcare, education and consumer goods," a Solidance report noted.
President Rodrigo Duterte's government has pledged to spend US$168 billion on infrastructure until 2022, giving further impetus to GDP growth over the next five years. To encourage more foreign businesses to invest in the country, the administration staged its first roadshow in Singapore in August, highlighting a vibrant economy and branding the Philippines as Asia's "next economic powerhouse", brimming with growth opportunities.
Last year, completed M&A transactions in the Philippines were worth $8.6 billion, comprising 42 deals, compared to $2.8 billion from 47 deals in 2015, said Solidance, citing data from MergerMarket. Big-value deals, including those in telecommunication, energy and construction drove the substantial growth after a huge dip in 2015, it added.
Major deals included the joint acquisition of Vega Telecom Inc from San Miguel Corporation by Globe Telecom and PLDT Company; the acquisition of the GNPower Mariveles Coal Plant Ltd by Aboitiz Power Corp; and the acquisition of Republic Cement from Lafarge Philippines by a joint venture of Aboitiz Equity Ventures and Cement Roadstone Holding, respectively. These three deals were valued $3.7 billion.
"M&A activities in 2015 and 2016 were generally dampened by political uncertainties surrounding the 2016 national election as companies preferred to defer strategic investment decisions until economic policies have stabilised under the new government," said the report.
In the past three years, the energy sector has dominated the flow of M&A activity in terms of both value and volume, primarily due to heavy demand for power. Government initiatives have also created investment opportunities for energy projects. Consumer goods, financial institutions and construction were also among leading sectors for transactions.
Solidance pointed out that energy, financial services and consumer goods remained key sectors for future M&A activity as "energy continues to play an integral role in economic growth". A reliable and competitive energy sector remains a priority in national policymaking, and the government recently issued an executive order to streamline regulatory procedures to fast-track energy projects.
More deals in the financial services sector are also expected as Bangko Sentral Ng Pilipinas (BSP) continues to pursue a policy encouraging mergers and consolidations of local and rural banks. As well, a law passed in 2014 allows a BSP-approved foreign bank to acquire up to 100% of the voting stock of a Philippine bank and to establish a banking subsidiary.
Besides government measures to spur economic activity, a comprehensive tax reform programme has been announced. The aim is to sustain economic growth by improving the purchasing power of consumers by lowering personal tax rates, while increasing taxes on fuel and luxury goods. "This reform is expected to increase consumption, encourage more investment and consequently, M&A activity in the country," the Solidance report noted.
At the same time, the landmark antitrust law will improve investors' confidence, said Solidance. The Philippine Competition Act was finally enacted in June 2016, a quarter century after being first proposed. It regulates monopolies, promotes fair market competition, reviews M&A deals with transaction value of more than one billion pesos ($20 million) and assesses whether a transaction will restrict or diminish competition in the relevant market.
The creation of the Philippine Competition Commission (PCC) adds another layer to the consummation of the M&A process, as reviews usually take 30 days but can extend to up to 90 days. Parties are subjected to an administrative fine of 1-5% of the transaction value if they proceed with their M&A agreement within this timeframe.
In just over a year since it was formed, the PCC has received 122 M&A deals, of which 99 have already been reviewed. None were blocked or prohibited, excepted for the disrupted joint purchase of Vega Telecom by Globe and PLDT Co. It had already been completed in May last year before the Competition Act was enforced the following month, and the PCC requested a retroactive review of it.
