Jollibee and Mang Inasal: Who's Got the Better

Deal?

Jollibee and Mang Inasal: Who's Got the Better Deal?

While everyone was busy monitoring the whereabouts of Typhoon Juan last week, Jollibee Foods
Corporation (JFC) disclosed to the Philippine Stock Exchange that it is acquiring 70% of the shares of
Mang Inasal for Php3 billion. This came as a surprise to many people, which stockbrokers, analysts,
investors, and ordinary consumers.
Mang Inasal has been a phenomenal success in the retail food and beverage industry, being the
fastest growing food chain in the country with total of 303 branches in just seven years. No one
expected this acquisition will happen too early in the game given the strong momentum going for
Mang Inasal. The Chicken Inasal with unlimited rice was a huge success that it made Jollibee, the
countrys top fast food chain, come up immediately with its own version called Jollibee Chicken
Barbeque. This apparently was not enough to counteract the emerging dominance of Mang Inasal in
this segment. Mang Inasal has threatened Jollibees market share, prompting the latter to opt for a
swift buy-out of its competitor instead of battling it out for market share.
As they say, everything comes with a price. The buy-out strategy appears to be viable but not without
a hefty price tag of Php3 billion to acquire a rising superstar like Mang Inasal. Was the price worth it?
Who got the better deal? Well, we can never tell for now but we can make a good guess using
information that has been disclosed so far.
If the 70% ownership of Mang Inasal is valued at Php3 billion, then the 100% valuation of the
company must be Php4.3 billion. This is computed by dividing Php3 billion by 70%. With a valuation of
Php4.3 billion for the whole company, it can be inferred that the price proposed by Jollibee for each
branch of Mang Inasal is estimated roughly at Php14 million. This is almost twice as much the
franchise fee for a brand new Mang Inasal outlet. In spite of this, Jollibee will not be able to own all
303 branches as Mang Inasal owns only 24 while the remaining 279 have all been franchised. The
Php3 billion balance and the cost of the 24 Mang Inasal-owned outlets is the premium Jollibee has to
pay for the earning power of the Mang Inasal brand.

Now, here is the next question. Is the premium worth it? Lets say each outlet of Mang Inasal is worth
Php7.0 million. So with 24 company-owned outlets, that is Php168 million. Lets add an allowance of
Php100 million so that makes it Php268 million. The premium is computed by getting the difference of
the cost and the Php3.0 billion, which results in Php2.7 billion. Assume that the average annual gross
sales per outlet is Php12.5 million, applying the 7% royalty and advertising fee that Mang Inasal earns
from franchisees, this would be Php875,000. With 279 franchisees, this would be tantamount to
Php244 million annually. Given the premium of Php2.7 billion, it will take roughly 11 years for Jollibee
to recover it. If you take the present value of the annual royalties for 11 years using an 18% discount
rate, this will have a value now of Php1.1 billion only. The extra cost Jollibee will pay is estimated to be
at Php1.6 billion (Php2.7 billion Php1.1 billion).
Lets look at the other way of the valuation process using the Price/Earnings ratio. Jollibee says in the
disclosure that Mang Inasals acquisition will increase their net operating income by 7%. There are no
details given as to how much is the annual net income of Mang Inasal but we can estimate that if the
net operating income of Jollibee for 2009 was about Php3.3 billion, then the increase of 7% is Php231
million, which must be the annual income of Mang Inasal. Using this figure as the basis for earnings,
the Price/Earnings ratio paid by Jollibee must be 19x. This is computed by taking the total value of
Mang Inasal, which is at Php4.3 billion divided by Php231 million of estimated earnings.
What is the meaning of 19x Price/Earnings ratio? This means that it will take about 19 years of Mang
Inasals earnings to recover its Php3 billion investment. The other way to look at it is simply get the
70% share of Jollibee in Mang Inasals Php231 million income which is Php162 million and divide it by
Php3 billion. This earns you a yield of only 5% per annum, just about the yield you get from the bank.
From this exercise, it appears that Mang Inasal got the better deal. It stands to gain a windfall that
will guarantee the owner of consistent earnings with hardly doing anything. As for Jollibee, they will
need to justify the premium by expanding Mang Inasals network to increase earnings and shorten
payback period or else they will risk destroying shareholder value. The acquisition is strategic to
Jollibee and this may prove beneficial over the long term but for now there are issues that remain to
be seen. How soon can Jollibee integrate Mang Inasal into their system and increase operational
efficiency? How much more capital expenditures Jollibee needs to shell out to improve Mang Inasal?
How will Jollibee finance the acquisition? How will this affect dividend policy if it uses its own cash
flows?
How has this affected the stock price? The market was excited to hear the news about the acquisition
that it pushed the share price of Jollibee to an all time high of Php100 last week before it corrected to
Php93.50. This price reflects how positive the market is on the deal. The earnings per share of Jollibee
as of 2009 was Php2.60. Assume that the projected earnings growth this year will be 15%, that
makes earnings per share at Php3.00 by end of 2010. If we incorporate the earnings of Mang Inasal

by 2011 and say we are positive that it will grow by 20%, that will give you Php3.60. Using this as a
basis, the current Price/Earnings ratio of Jollibee is estimated at 26x, which by market standards is
relatively expensive. If we use 19x Price/Earnings ratio as fair value, then the stock price of Jollibee
should be trading at the vicinity of Php70. As further upside may be limited, perhaps, this is a good
time to take profits if you have bought some shares

Advantages
The rationale behind a spinoff, tracking stock or carve-out is that "the parts are greater than the
whole." These corporate restructuring techniques, which involve the separation of a business
unit or subsidiary from the parent, can help a company raise additional equity funds. A break-up
can also boost a company's valuation by providing powerful incentives to the people who work
in the separating unit, and help the parent's management to focus on core operations.Most
importantly, shareholders get better information about the business unit because it issues
separate financial statements. This is particularly useful when a company's traditional line of
business differs from the separated business unit. With separate financial disclosure, investors
are better equipped to gauge the value of the parent corporation. The parent company might
attract more investors and, ultimately, more capital.Also, separating a subsidiary from its parent
can reduce internal competition for corporate funds. For investors, that's great news: it curbs the
kind of negative internal wrangling that can compromise the unity and productivity of a company.
For employees of the new separate entity, there is a publicly traded stock to motivate and
reward them. Stock optionsin the parent often provide little incentive to subsidiary managers,
especially because their efforts are buried in the firm's overall performance.

Disadvantages
That said, de-merged firms are likely to be substantially smaller than their parents, possibly
making it harder to tap credit markets and costlier finance that may be affordable only for larger
companies. And the smaller size of the firm may mean it has less representation on
major indexes, making it more difficult to attract interest from institutional investors.Meanwhile,

there are the extra costs that the parts of the business face if separated. When a firm divides
itself into smaller units, it may be losing the synergy that it had as a larger entity. For instance,
the division of expenses such as marketing, administration and research and
development (R&D) into different business units may cause redundant costs without increasing
overall revenues.

ollibeeanditsMergingStrategy
Chicken joy, Yumburger, Jolly spaghetti, these are just some of the classic meals Jollibee has been
offering for the past decades. Over the years it has completely taken over the fast food industry here in
the Philippines by entrancing the masses with their top of the chart food line and skyrocket profits.
Although at some point, things shifted slowly out of Jollibees control, competition became thougher and
people preferred to dine at other fast food restaurants like McDonalds and KFC.

In order to strengthen their market in the fast food industry, Jollibee started to veer their focus.
Instead of focusing on how to satisfy their customers more and improving their products, they increased
their profits abundantly by purchasing other food companies. In 1994, Jollibee started merging with other
companies and bought 80% of Greenwich Pizza which enabled them to also penetrate the pizza-pasta
market. Years pass and they also got a hold of Delifrance Asia, Chowking, Red Ribbon and Mang Inasal.
Just try and imagine how strong Jollibee is now and how wide their market is. No wonder it tops the fast
food industry here in the Philippines.

An astute move of focusing on their competitors rather than their products lead them to
dominance of food services in the Philippines. Their dominance is evident from acquiring and merging
with companies in the Western Pizza and Pasta segment to the Oriental quick-service restaurant
segment. Merging and acquisition seemed to have been an effective strategy for Jollibee not only
because of its dominance but also because of numerous other reasons. Merging and acquisition
increases revenue through decreased manufacturing and human labor costs. Extra budget is allotted for
product improvement. Merging cancels out coinciding jobs decreasing the costs for salary.

However, like everything else, merging and acquisition have their disadvantages. As stated
earlier, merging and acquisition cuts human labor costs. This means many people lose their jobs because
of coinciding jobs. Merging and acquisition only concerns the managers and the top people of the
companies. This results to poor staff communication. Staffs are usually not informed about acquisitions
therefore earning negative comments from them.

Merging and acquisition seemed to be the best idea when Jollibee acquired it. However, it has
also negatively affected Jollibee in some ways. When Jollibee merged and acquired Mang Inasal,

Chowking, Delifrance, and Greenwich, it has forsaken product innovation. The same menu occupies the
lighted boards in Jollibee stores when customers come in and rarely does it change. This may be a minus
factor for them because other food companies introduce new products every now and then. Like KFC for
instance, they have been introducing new products almost every season.

Merging and acquisition can be considered as a gold mine to big companies, but it affects
consumers and majority of Filipinos gravely. This might be a good thing for Jollibee but there is an
ongoing concern that should certainly avert your attention from whatever you might be doing right now.
Jollibee is not far from monopoly through merging and acquiring with other companies. It might seem
unlikely, but with the power Jollibee has right now, it seems possible in time. Becoming a monopoly will
lessen competition, drive prices up and sacrificing consumers' welfare. Competition is what keeps prices
from increasing. Companies need to stabilize their prices in order to keep up with competition. Jollibee, if
it becomes the lone manager of food services in the country, can make a lot of profit by increasing prices
perpetually since there are no significant competitors. One should not be surprised buying one-piece
chicken with rice worth Php200 because there are no other stores he/she can go to. Such is the
detrimental effect of Jollibee monopolizing.

Jollibees merging and acquisition with other companies compromises many jobs. This will result to
many Filipinos losing their source of income. The other workers who luckily kept their jobs have to deal
with a new boss, a new task, and a new struggle to keep their jobs. Merging and acquisition only has
benefits to the big companies which can create humungous profit using any strategy leaving hopeless
Filipino consumers and workers crawling under their dominance.
-Ferdinand Badillo