Thursday, November 18, 2010

Jollibee - Mang Inasal Update


If you take a brief look at our front page, you'll see that our Mang Inasal post about a month ago is now the most viewed post on this blog. So, since we all clearly still haven't had enough of this "match made in heaven," here's the latest on the Jollibee-Mang Inasal acquisition.

Don't get your hopes up, it's nothing much, really: it's just that this news article press release confirms that money has already changed hands and that the deal is now official. Mr. Edgar "Injap" Sia is now 1.55 billion pesos richer, and on November 22 he can add 1.15 billion pesos more to his stash; the remaining 300 million or 10 percent of the purchase price will be withheld and paid over the next three years as "assurance for indemnification against the seller’s representations and warranties," whatever that fancy phrase means.

All this is really not very interesting, as we all had been pretty much certain that the deal will push through. So to add a little spice to this post, let's take a closer look at how Jollibee (JFC) justifies the purchase to the investing public, how the deal "is estimated to add at least 5 percent to JFC’s worldwide sales, 5 percent to total revenues and 7 percent to net operating income attributable to parent equity holders." (By the way, if you check out that article a month ago, you'll notice that JFC has already made this exact same statement then, which may mean countless things that I'll leave up to you to think about.)

A 7% increase in operating income (earnings before interest and taxes) roughly translates to an increase in net profit and dividends of 5% (7% x (1 - 30%) = 4.9%, where 30% is the corporate tax rate) from present levels. Just before the announcement, on October 15, JFC had a total market capitalization (just a fancy term for market value) of around 90 billion pesos; the expected 5% increase in profit and dividends should then result in an increase in value of 5% of 90 billion or 4.5 billion pesos, 50% higher than the acquisition price of 3 billion pesos. So, on paper, if we believe JFC's pronouncement that its purchase of the majority stake at Mang Inasal will result in a 7% increase in operating profit, then the deal makes perfect (and handsomely profitable) economic sense for Jollibee.

But what do investors think? Well, since that extraordinary jump in stock price from 89.80 to 97 just after the announcement was made, there had been no sign that investors believed the deal would provide 1.5 billion pesos (4.5 billion - 3 billion) of additional value to the firm; in fact, the stock is now even a few points lower than the pre-announcement price, closing at 87 pesos in today's trading. A sign that investors don't like the deal? Or don't like the deal enough to wait for the promised gains to materialize?

But maybe you'd want look at it this way, instead. If you think it makes sense that Mang Inasal would increase Jollibee's total sales by 5% or operating profit by 7%, just as JFC announced, then Jollibee at 87 pesos is a bargain, and if you buy now you stand to gain around 5% when the stock reaches its "true" price of 91.50 per share.

What do you think? Just look at all these interesting possibilities. Isn't investing fun? :)
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