The Philippines: The Ayala Touch
It was the kind of deal that gives a business leader a lasting reputation for shrewdness. Back in 1995, a bidding war broke out for tracts of one of the hottest properties in the Philippines -- Fort Bonifacio, a 440-hectare former U.S. military base not far from downtown Manila. The winning bid for the largest tract available, measuring 150 hectares, was $1.6 billion, and it came from a consortium led by First Pacific Co., a Hong Kong holding company headed at the time by Filipino Manuel Pangilinan. One of the losing bidders was Ayala Corp., a smaller conglomerate controlled by one of the oldest families in the Philippines.
First Pacific and its partners -- local property developers and the Philippine government -- spent an additional $300 million developing the land before First Pacific was laid low by the Asian financial crisis of 1997-98. In the ensuing years, cash-hungry First Pacific repeatedly made it known to the Ayalas that a nicely landscaped 54 hectares could be had for a low price. But the figure was never low enough. Finally, Jaime Augusto Zobel de Ayala II, the urbane, Harvard-educated CEO of Ayala Corp., wore First Pacific down. Last November, he grabbed a controlling stake in First Pacific's consortium for a paltry $90 million.
The original Fort Bonifacio deal is just one of the bets that the Ayalas didn't make in the roaring 1990s. The conservative clan, which started as a 19th century Spanish colonial trading house, rejected megadeal after megadeal as too expensive or speculative. "We were actually criticized for being behind the ball," recalls Zobel de Ayala, 44. That has allowed Ayala Corp., the family holding company, to maintain its position as the premier business group of the archipelago. It has long been a dominant force in real estate, construction, banking, and electronics and is a rising power in telecommunications. When multinationals J.P. Morgan Chase, Burger King, and Deutsche Telekom came to Manila looking for joint-venture partners, Ayala was their hands-down choice. Ayala Corp. and its various offshoots took in $1.6 billion in revenue in 2002, earning a profit of $300 million. The Ayalas plan to develop Fort Bonifacio, now a bustling construction site, into a new business center that they hope will help reverse the flight of foreign investment from the Philippines.
The Ayala balance sheet is not blemish free. Ayala Corp. is burdened with $630 million in debt. Unfortunately, 87% of it is denominated in U.S. dollars, at a time when the Philippine peso has lost 34% of its value in six years. Concern over the debt has helped push the share price of Ayala Corp. down 37% since February, 2002. And it will drive up the cost of raising financing to develop Fort Bonifacio for Ayala Land Inc.
Still, few observers of Philippine business have any worries about the viability of the Ayala empire. Zobel de Ayala has run the business with a deft hand since 1995, after the firm's now 68-year-old patriarch, Jaime Augusto Zobel de Ayala, or Don Jaime, retired (he still attends board meetings as the nonexecutive chairman). Jaime's brother, Fernando, holds the title of executive managing director at Ayala Corp., and the two run the conglomerate as partners.
The family's cash cow is Globe Telecom Inc., the first Philippine cellular network to employ digital GSM technology, now the industry standard worldwide. Globe, after a hefty investment of at least $1.8 billion by the Ayalas and other shareholders, has grabbed a 43% share of the cellular market from former monopoly Philippine Long Distance Telephone Co. (PLDT), part of the First Pacific empire and now run by Pangilinan. Zobel de Ayala boasts that Globe has a 51% revenue share because of its more upmarket clientele. "Globe gets more out of its customers than PLDT," says Jojo Gonzales, head of research at Philippine Equity Partners Inc., the local affiliate of Merrill Lynch & Co. Last year, Globe's net income surged 59% on a 43% increase in its subscriber base, to 6.6 million customers. Its profit margin is a fat 60%, says Zobel de Ayala.
In other sectors, the Ayalas appear to be succeeding by not setting their sights too high in a market with per capita income of less than $1,000 a year. In real estate, Ayala Land's profits grew 10% last year on a strategic shift downmarket from ultrachic malls and apartment blocs to working class housing and hypermarts. The Columns, a novel twin-tower development of affordable one-bedroom and studio apartments in Manila, is 80% presold, even though it's still just a muddy crater at the northwest end of Ayala Avenue.
Meanwhile, the Ayalas' Bank of the Philippine Islands is a profitable pillar of the financial community, while Ayala Land has maintained a steady revenue stream even in this sour economic climate by, for instance, charging stores a nominal rent plus a percentage of sales. Other Ayala companies are also doing well. Manila Water Co. tripled profits by bringing 500,000 new homes into its network, and it announced plans to invest $1 billion in further expansion. Integrated Microelectronics Inc., a contract manufacturer, increased earnings 9% on an increase in orders from Japanese customers. Ayala Automotive Holdings Corp., which assembles and sells Honda cars and Isuzu trucks, registered a 45% increase in retail sales.
As a result, profits at Ayala Corp. grew 13% last year, on a 10% increase in revenues. Ayala Corp. got a leg up on its debt in April when Ayala Land, Globe, and Bank of the Philippine Islands returned a total of $49 million in dividends to the parent company, an increase of 77% from a year earlier, estimates UBS Warburg.
Ayala Corp. is pinning part of its future growth on the success of Fort Bonifacio, on which the Ayalas plan to build a mix of office blocks, medium-density housing, and retail stores. Many hope the addition of new offices and homes to the area will give the real estate market a long-overdue reality check. "At least this will bring down Manila property prices to more realistic levels," says Richard Raymundo, research manager at the Manila office of Colliers International, a real estate brokerage. UBS Warburg estimates that after Bonifacio is developed, it will fetch Ayala Land a gross rental yield of 15%, more than most Manila landlords earn.
It may take some time for the Ayalas to see a return on their investment in Bonifacio. Zobel de Ayala says the project will be developed in phases over several years after the original blueprint is "cleaned up." Analysts say the project could be a decade away from a substantial revenue stream, and Zobel de Ayala admits that foreign investors haven't shown an interest yet.
Nevertheless, especially given its bargain price, no one expects the investment to fail. "It's very rare to find an Ayala project that isn't doing well," says Romina Magno, senior research manager at the Manila office of international real estate brokerage Jones Lang LaSalle LLP. Chalk that up to a lot of clout, a dollop of patience, and no small amount of shrewd dealmaking.
By Michael Shari in Manila