Jan 18, 2013 3:45am
by Roel Landingin

When Saudi Arabian investors suddenly needed to sell an 80 per cent stake the unfinished Fairmont Hotel and Raffles Suites and Residences project in the Philippines’ Makati financial district late last year, their local partner lost no time stepping up to the plate.

It probably helped that the Saudis’ local partner was the Ayala Corp, the Philippines’ oldest business house. In short order, the Filipino group bought out the Saudis for $24m and went on to complete the project’s 280 rooms, 32 suits and 237 serviced residential units in time for the peak Christmas season. The hotel opened its doors at exactly 3:33 pm on December 3.

But more important than having the requisite cash for a quick buyout, the Ayala Corp is in a bullish mood. Last year, it made the biggest outlay for capital expenditures in its 178-year history across several core businesses.

The group has history and a wide reach. Ayala built the country’s premiere business district in what used to be marginal grasslands owned by the Ayala family. The Philippines’ Wall Street, Ayala Avenue, used to be a runway for the family-owned airport at the remote edge of Manila, the capital. The Ayalas own the country’s biggest real estate developer, its second biggest phone company, its third biggest bank, and one of two private water companies serving the capital region. In the last year or so, it launched a number of infrastructure companies to bid for contracts to build and operate train systems, airports and toll roads being tendered by the government under a public-private partnership programme.

“I would say that the level of confidence in our group is quite high about the medium-term policies of the country and the current leadership,” Jaime Augusto Zobel de Ayala, the group chairman, told the Financial Times in December. “We’re investing more this year than ever in our history – about 90bn pesos [$2.2bn] in group-wide capital expenditures.”

The group is particularly optimistic about the country’s tourism potential. On January 11, the Ayala property company announced plans to build a giant entertainment complex worth 20bn pesos on a 21-hectare former horse racing track in Makati, just a few kilometres from the business district. The project will include an international size football field, a 1,500 seat theatre, and a two-hectare ground for concerts and similar events. There will also be a 250-room hotel, a mall and residential towers.

The company plans to build between 3,000 and 4,000 hotel rooms in various parts of the country in the next two to three years. It also wants to acquire as much as 1,000 sqm of beach and island properties in the Visayas islands in the central Philippines where the country’s top tourist destinations such as Cebu and Boracay are located.

Ayala is making a big bet on the success of the government’s ambitious plans to attract 10m tourists by 2016, more than double the 2011 figure of almost 4m. Two international travel magazines – Conde Nast Traveler and Travel + Leisure Magazine – recently featured the Philippines as a top travel destination this year.

“We’re bullish because of the economy, and the government is very helpful right now in promoting tourism,” said Jose Jalandoni, president of AyalaLand Hotel and Resorts Corp. He said lack of access to properties and infrastructure remained the biggest challenge to tourism but added that the government was beginning to address the problem by building more airports and roads.

Elfren Cruz, a business professor and expert on family corporations, says Ayala Corp, which began as a partnership in Manila between a rich Spanish landowner Domingo Roxas and his adventurous Basque industrial partner Antonio de Ayala in 1834, is probably the longest-lasting family-owned enterprise in the Philippines. The heirs of the Roxas, Ayala and Zobel families managed to remain at the helm of the business empire for seven successive generations. The partnership became a corporation in 1968, adopting the name Ayala Corp, and listed on the stock exchange eight years later.

Unlike other family-owned businesses which often fall apart after the third or fourth generation, Cruz says the Ayalas have got two things right. “They separated ownership from management, allowing them to hire the best professionals to run their companies,” he says. “The family also made timely shifts in business focus in response to underlying changes in the economy.” The development of Makati in the late 1940s in line with 25-year master plan and a strategic diversification to telecommunications and water in the 1990s, proved important, he says.

Astro del Castillo, managing director at investment advisory firm First Grade Holdings, says Ayala Corp’s huge investments in tourism and infrastructure is in line with widespread expectations that the Philippine economy is poised for faster growth in the next several years. “They are bullish like everyone else but they are better-placed than others to exploit the opportunities because of their strong balance sheet built from years of sound and conservative financial management,” he said.

Ayala’s shares have risen over 50 per cent in the last year. But despite Ayala getting more expensive, three of seven analysts surveyed by Reuters still have a buy recommendation on the stock while three recommend hold with one saying outperform. The company’s last annual statement in December 2011 showed net income rose to 9.3bn ($220m) pesos, on revenues of 106bn ($2.6bn) pesos. The estimate for 2012 full year is for net income to rise to 11bn pesos, on revenues of 100bn pesos, according to data from Capital IQ.

The Ayala group’s enormous capital spending plans entail taking on more risks. The consolidated debt of Ayala Corp and its subsidiaries soared 25 per cent in just nine months to 133.4bn pesos as of end-September 2012 from the beginning of the year. The net debt to equity ratio has rapidly risen to 0.37 from just 0.24 in 2011 and 0.12 in 2010, though the latest debt ratio is just a third of the internal debt to equity ratio target.

But, surely, Ayala Corp did not get to last all these 178 years without taking risks from time to time.

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