First Pacific: Take Two

Profits are back after a major cleanup

If ever one business epitomized the woes of Southeast Asia's conglomerates since the crisis of 1997, it would be First Pacific Co. Based in Hong Kong, with most of its operations in Manila and Jakarta, this company expanded at breakneck speed under the guidance of two of Asia's best-known ethnic Chinese tycoons -- serial dealmaker Manuel V. Pangilinan of the Philippines and his boss, the politically connected Anthony Salim of Indonesia. The pair cobbled together an empire of real estate, packaged foods, banking, and telecoms -- and sold investors on the idea of First Pacific as a big play on Asia's rising wave of prosperity. Then heavy debt, regionwide recession, the meltdown in Indonesia, and a boardroom feud hammered the company. In particular, shareholders punished Salim and Co. for overpaying for property and telecom assets in the Philippines. The stock has declined by 70% since its peak in August, 1996. "These guys did pretty well during the good times, but they failed investors miserably after things turned south," says Michael Alan Hamlin, a business consultant in Manila.

But nearly seven years after the crisis, First Pacific is starting to look like a survivor -- and maybe even a winner. Over the past year, management has been busy selling once high-priced assets at down-to-earth market prices, converting dollar-denominated debt to local-currency debt, writing off bad investments, and forcing out underperforming managers.

As a result, the Hong Kong-listed holding company returned to profit last year, announcing a net income of $40 million on Apr. 17, compared with a loss of $1.8 billion in 2001. UBS Warburg expects its profits to double next year. First Pacific stock outperformed the Hang Seng index by 40% over the past 12 months. True, questions linger about the company's focus, but Pangilinan, for one, is unperturbed. "At the end of the day, it's a question of performance," says the burly 56-year old Filipino.

The road to recovery has been rocky. Pangilinan and Salim have been close ever since they attended the University of Pennsylvania's Wharton School together in the 1960s. But that didn't stop Salim, who was eager to write down debt, from trying last year to oust Pangilinan and sell First Pacific's controlling stakes in Philippine Long Distance Telephone Co. (PLDT) and the sprawling Fort Bonifacio real estate project in Manila to rival Filipino tycoon John L. Gokongwei Jr. The ensuing boardroom battle ended in a stalemate. Pangilinan and his lieutenants were too firmly entrenched on the boards of First Pacific and its subsidiaries for Salim to remove them, and Pangilinan found a legal loophole that prevented PLDT from being sold to a direct competitor, say sources close to First Pacific's management. (Gokongwei also runs a telecom company.) In the end, Pangilinan kept his jobs at First Pacific and PLDT but bowed to Salim's insistence on selling Fort Bonifacio. Salim also reasserted his influence by appointing his Indonesian right-hand man, Benny Santoso, to PLDT's board. Though it was one of Asia's highest profile splits, a senior Salim associate in Jakarta dismisses the episode as "a difference of opinion."

Thus far, the cleanup appears to be going smoothly. Metro Pacific Corp., the group's Manila-based property arm, raised $90 million by selling 54 hectares of the Fort Bonifacio project to rival Philippine developer Ayala Land Inc. The sale price comes to $660 a square meter, half what First Pacific paid for its acreage in 1997 -- a number Pangilinan admits he settled on in part with the help of a feng shui specialist. "I just said, `Look, can we just construct the numbers to make it look like it's good feng shui?"' admits the dealmaker.

While Metro Pacific continues to whittle away its losses, among First Pacific's remaining companies, the investors' pick remains its telecom division, PLDT, which is publicly traded in Manila. Commanding more than half the Philippine cellular market, PLDT saw its profits rise 10% last year, to $59 million. PLDT restructured last year, refinancing or paying off $1.3 billion in debt. Now, PLDT is well-positioned to benefit from continued growth in demand for affordable cellular services such as prepaid subscriptions and text messaging, which are popular in a country with an average per capita income under $1,000.

First Pacific's cash cow -- and another investors' darling -- is Indofood Sukses Makmur, the world's biggest producer of packaged instant noodles. "People in Indonesia aren't going to stop eating noodles anytime soon," says Rob Hart, a securities analyst at Morgan Stanley in Hong Kong. Since 1997, Indofood has cut its dollar-denominated debt in half, to $450 million. With revenues of $2.2 billion in 2002 -- up 13% -- securities analysts in Jakarta say Indofood is in an ideal position to grow through acquisition of other Indonesian brands.

Still, some investors remain skeptical that First Pacific is out of the woods. "The company appears to be running low on ideas to remedy the cash-flow situation," says Hart. On April 17, the company reported a net cash outflow of $24 million, citing a 64% drop in net cash generated from operations. This partly reflects the situation at fast-growing PLDT, which has to write off the cost of obsolete analog equipment at its cellular subsidiaries. And PLDT is also eating up cash as its builds out a new digital network. A Morgan Stanley report warns that it could take "several years" before PLDT, which stopped paying dividends in 2001, resumes dividend payments to shareholders -- including holding company First Pacific. The company still has $3 billion of debt and faces stiff competition from Gokongwei's Digital Telecommunications Philippines Inc. "It [PLDT] has a formidable task ahead," acknowledges Pangilinan.

PLDT's write-downs and debt obligations mean that the only First Pacific asset paying out dividends is Indofood. Since First Pacific relies on the noodle maker for a significant chunk of its cash flow, it is critical that Indofood keeps throwing off that money. And although the food business is solid, the onus is still on Pangilinan's partner, Salim, to generate more cash.

Jakarta analysts would like Salim to shed Bogasari, Indofood's huge flour mill, to raise the cash needed to acquire more local food brands, pointing out that the company could buy its flour on the open market. But plans to sell Bogasari -- which was founded by Salim's father -- remain perpetually on hold because Salim attaches "emotional value" to the mill, says Indofood President-Director and CEO Eva Riyanti Hutapea. Trouble is, you can't bank emotions: That's a painful lesson for anyone, tycoon or no.

By Michael Shari in Manila and Jakarta

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