In the Spotlight - Heineken swallows FEMSA
Heineken's share price has shot up this week, from around EUR33 (US$48) at the beginning of 8 January to EUR36 by midway through today (15 January). Investors, then, clearly view the brewer's EUR3.8bn (US$5.5bn) all share deal for FEMSA Cerveza as a positive.
Analysts contacted by just-drinks shared this outlook.
"Prior to the acquisition, Heineken was criticised for its relatively higher weighting in developed markets, which recently have suffered unprecedented volumes declines, which could in fact indicate more troublesome structural shifts," one analyst told just-drinks earlier this week.
Heineken will significantly increase its exposure to beer growth markets via the deal.
"Given the small number of remaining attractive targets, this deal was considered as potentially Heineken's last shot," she said.
Gerard Rijk, analyst at ING Bank, agreed. "Without this, they would have been much worse off," he told just-drinks, adding that the brewer has won extra plaudits for achieving the deal at a relatively low price.
just-drinks understands from sources that SABMiller, for long periods considered the more likely winner in a FEMSA bidding battle, quit the race due to concern over valuation and FEMSA's somewhat troubled beer arm in Brazil. Strategically the deal was less important for SABMiller.
Bernstein analyst Trevor Stirling said following the deal: "We believe that the deal is a good strategic fit for Heineken, primarily because it will increase the percentage of EBIT coming from fast-growing emerging markets from 30% to 40%."
Commenting on SABMiller's exit from the bidding table and the deal in general, Bernstein highlighted concern shared by several analysts about FEMSA's position in Brazil. It is number three on the market, behind a dominant A-B InBev, and has struggled to make a profit.
"There are genuine concerns over the viability of FEMSA's Brazilian beer business, which is dependent for its distribution on 18 or so Coke bottlers, only three of who are owned by Coca-Cola FEMSA," said Bernstein.
"There is a grandfathered deal in place which lasts until 2020 but there must at the very least be a danger of the bottlers de-emphasising beer to focus on CSD, especially since the beer business has lost significant share in recent months."
Rijk believes Heineken can make headway in Brazil with its premium namesake brand and via its sponsorship of the popular UEFA Champtions League football tournament. Although Brazilian teams do not feature in the event, Brazilian players make up the largest national contingent.
"While achievable, it won't be easy," wrote Matthew Curtin in the Wall Street Journal this week. He added that, across the business, "to make the numbers work, Heineken needs FEMSA's sales growth to hit 10% to 11% from a prerecession 8%".
A comment on Breakingviews, published on the New York Times blog, added that there are risks involved for Heineken. While the deal price is in-line with other acquisitions of similar size, it "will not cover Heineken's cost of capital for six years", it said.
On the fallout from the deal, Reuters focused on Mexico as the new "battleground" for brewers.
Analysts told just-drinks earlier this week that A-B InBev may seek control of FEMSA's domestic rival and the country's number one brewer, Grupo Modelo. A-B InBev and Modelo are currently locked in a dispute over a stake in the Mexican brewer previously held by an independent A-B.
"Heineken's success in Latin America may depend on how fast it carves out a niche for itself," according to Jenny Wiggins at the Financial Times.
"Though it is skilled at selling premium brands, Heineken is still not as profitable as global market leaders ABInBev and SABMiller," she wrote.
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