FEMSA beer in sales talks
Well, it was only a matter of time before stock market-listed FEMSA would spin off its beer business. FEMSA’s brewing unit, FEMSA Cerveza, has been overshadowed for years by its soft drinks division Coca-Cola FEMSA (KOF), the largest Coca-Cola bottler in Latin America.
Obviously, buyers were getting desperate to lay their hands on FEMSA Cerveza (read: they offered a decent price) and on the Mexican market, which ranks as the world’s sixth largest. Mexico’s beer market is a duopoly of Grupo Modelo (Corona Extra) and FEMSA Cerveza, which has a 40 percent share of the market. FEMSA Cerveza benefits from FEMSA’s network of more than 6800 OXXO convenience stores in Mexico that only sell its beer brands.
Last year, FEMSA Cerveza accounted for 24.6 percent of FEMSA’s total sales of MXN 168 billion (EUR 8.4 billion), and 23.8 percent of operating income. It sold 41.1 million hl of beer in 2008, with Mexico representing about 67 percent of sales volume, Brazil 25 percent, and exports 9 percent. FEMSA Cerveza generated net sales of about USD 3.8 billion from beer and operating profits of USD 484 million. Alas, its performance has been dragged down by the loss-making Brazilian business, Kaiser.
Incidentally, FEMSA Cerveza has strong ties to Dutch brewer Heineken, which owns 17 percent of FEMSA’s Brazilian unit. Heineken is also the exclusive importer, marketer and distributor of FEMSA’s beer brands in the U.S., with a contract expiring at the end of 2017 only. All of the above would make Heineken a natural choice for FEMSA.
However, does Heineken have the kind of money that FEMSA is asking for? Heineken is still reeling from its takeover of Scottish & Newcastle last year and a recent EUR 400 million offering will be used to partially refinance existing debt.
In effect, the FEMSA-Heineken link does not rule out FEMSA Cerveza eventually combining with SABMiller. SABMiller will not stand in the wings and look on passively while Heineken and AB-InBev split up the Mexican beer market between them. Despite the public spat between AB-InBev and Grupo Modelo (they are currently engaged in arbitration), it is generally considered a given that over the mid-term, AB-InBev will absorb Grupo Modelo. AB-InBev has expressed interest in the asset.
Analysts say that FEMSA Cerveza could be worth no more than USD 7.5 billion, given that there is a risk of higher taxation on beer and – consequently – lower profits in Mexico. Mexico’s Government wants to raise the income tax rate and hike excise taxes on items like beer under its 2010 budget proposal before Congress.
Other market observers claim that SABMiller would be able to extract synergies of USD 372 million by 2013 out of the deal, estimating that the deal would be earnings-accretive even at a price of USD 9 billion. SABMiller, in which Altria, the tobacco group, has a 27.4 percent stake, could probably fund a deal entirely with debt, but may seek to issue shares to the family shareholders, who speak for 38 percent of FEMSA.
The sale of FEMSA Cerveza is still early days. But the consolidation of the global beer market surely looks set to gather pace again.
