SM starts consolidating retail businesses

OUR HOME is one of several retail stores to be consolidated under SM Retail, Inc. -- (FACEBOOK.COM/OURHOME.PH)

(Source: Business World | 29 February 2016)

Henry Sy, Sr., the Philippines’ richest man, is merging his retail assets under SM Retail, Inc. that will form an even larger business with nearly 2,000 stores and more than P260 billion in revenues, a move aimed at capitalizing on synergies amid tighter competition in the industry.

The Sy family will fold in Ace Hardware, SM Appliance Centre, Homeworld, Our Home, Toy Kingdom, Kultura, Baby Company, Sports Station and several other retail stores into SM Retail in exchange for new shares in the retail holding company, Corazon P. Guidote, senior vice-president for investor relations at SM Investments Corp. (SMIC).

She declined to provide the value of the transaction pending the approval of the Securities and Exchange Commission (SEC).

The retail stores that will be absorbed by SM Retail have a combined 1,374 outlets that delivered P53 billion in revenues last year. This will beef up the SM Retail’s existing portfolio of 53 department stores, 44 hypermarkets and 213 supermarkets as well as majority stakes in the local operations of Alfamart, Forever21, Crate & Barrel and other specialty and apparel retail retailers, in addition to a minority stake in Uniqlo.

“The industry is becoming more competitive in some ways. It helps that when they approach potential brands to locate in the Philippine market, mas may dating [there is more impact] because of the merger,” COL Financial Group, Inc. Vice-President and Head of Research April Lynn L. Tan said in a telephone interview.

The merger will create an enlarged SM Retail with 1,927 outlets and 2.4 million square meters of gross floor area across a diverse portfolio of food, household appliances, do-it-yourself, furniture, apparel, footwear, pharmaceuticals/cosmetics and specialty retailing businesses.

After the transaction, the conglomerate will reduce its stake in SM Retail to 77.3% from 100% since there are other minority shareholders who opted to keep their shares in the stores, Ms. Guidote said.

The deal remains “earnings accretive,” with the merger expected to “leverage on synergies across the group” and “enhance margins, returns and net asset value,” Ms. Guidote said.

SM Investments President Harley T. Sy was quoted in the disclosure as saying the merger adds “greater diversity” and bigger footprint to SM Retail’s portfolio, while consistent with efforts to simplify its corporate structure.

The move is similar to the consolidation of the Sy family’s property businesses under SM Prime Holdings, Inc. in 2013 that created the country’s biggest developer in terms of market capitalization, the younger Sy said.

“This will help the business grow. When you have scale and you’re a bigger organization, it’s easier to grow. It’s the same rationale with SM Prime,” Ms. Guidote said.

Last year, SM Retail reported a 17% growth in net profit to P6.8 billion after sales grew 7% to P211.4 billion, helping boost the conglomerate’s recurring profit by 13%.

Meanwhile, SM Investments reported flat earnings at P28.4 billion last year after taking to account the effect of the sale of its 2% stake in BDO Unibank, Inc. to Malaysia’s sovereign wealth fund Khazanah Nasional Bhd.

Aside from the growth in retail, the growth in SM’s underlying earnings was also driven by the 14% increase in the property unit’s recurring net income and 10% uptick in the bank’s bottom line.

“Our strong underlying earnings growth in 2015 was due to favorable domestic market conditions and improved efficiencies which helped us widen our margins particularly in retail and property,” Mr. Sy said.

For 2015, banks accounted for 40% of SM’s consolidated earnings, followed by property at 38% and retail at 22%.

Consolidated revenues grew 7% to P295.9 billion.

Shares in SM Investments fell 25 points or 2.96% to close at P820 each.

— By Krista A. M. Montealegre


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