The acquisition of Panamco by Coca-Cola FEMSA will give the Mexican soft drinks bottler and the The Coca-Cola Company a strong pan-Latin American bottling force. But the deal could also offer an attractive spin-off for the FEMSA beer brands. Ben Cooper reports.

Having gained antitrust approval in Mexico at the end of March, the US$3.6 billion acquisition of Panamerican Beverages Inc. (Panamco), by the Mexican soft drinks company, Coca-Cola Femsa, looks set to be completed by the middle of May.

The Coca-Cola Co. is heavily involved in the acquisition - it will own 39.6% of the merged company - which will considerably increase the powerbase of its largest bottler network in Latin America. While it has been stated that the acquisition will create the largest bottler of Coke brands in Latin America, this is something of a tautology as Panamco is already the region's largest bottler of Coke brands.

But the merged entity will be an even more powerful player. It will be the world’s second-largest Coca-Cola bottler, with estimated pro-forma revenues of US$4.6 billion and estimated total volumes, including soft drinks and water, of 1.8 billion unit cases. On a pro-forma basis, EBITDA of the two companies combined in 2001 was US$1.0 billion. The merged company would account for one third of Coca-Cola's total volumes in Latin America.

Coca-Cola Femsa, which is 51%-owned by the Mexican brewer, Fomento Economico Mexicano SA (FEMSA), and in which The Coca-Cola Co. owns a 30% stake, is already a major Coca-Cola bottler. It is the largest Coke bottler in Mexico and also has a substantial soft drinks presence in Argentina.

But with the Panamco acquisition, Coca-Cola FEMSA's geographical footprint in the region will be completely transformed, bringing in operations in Brazil, Nicaragua, Guatemala, Costa Rica, Panama, Colombia and Venezuela. Panamco also has a presence in Mexico which will be integrated into the existing Femsa operation. In all, the merged company, which will retain the name Coca-Cola FEMSA, will operate in nine Latin American markets.

But it is not only in the expansion of its soft drinks operations that the deal could be of benefit to FEMSA. The parent brewing company, which will emerge from the deal with a 45.7% stake in the enlarged Coca-Cola FEMSA, could see a handsome spin-off for its beer brands, Tecate, Sol and Dos Equis.

Currently, the principal export market for FEMSA beer brands is the US and Latin America is undeveloped export territory. But, given that combining beer and soft drinks distribution is much more common in Latin America than in Europe or the US, there is a strong likelihood that FEMSA's beer brands could be integrated into Coca-Cola FEMSA operations in Latin American markets, gaining substantially from the leverage offered.

So far, the company has been reluctant to say definitively that this will happen but it has hinted strongly that it is an option being considered, once the principal elements of the acquisition have been bedded down

"Integration is a real possibility in some of the markets where we operate currently and where we hope to operate in the future once the acquisition of Panamco is completed," said Femsa's chairman, Jose Antonio Fernandez, in the company's annual report. "This could represent an attractive opportunity of growth as well as alternative ways of generating revenues and profits for Femsa in the future."

This would give FEMSA an opportunity to keep up with the pace of expansion being set in Latin America by the regional beer powerhouse, the Brazilian brewer, AmBev. AmBev too combines beer and soft drinks in Brazil, where it is the chief bottler for Pepsi, Argentina, Uruguay and Venezuela, and with its recent acquisition of Quilmes in Argentina has further expanded its presence in the region.

FEMSA is also constantly striving to keep up with its Mexican rival, Modelo, which benefits hugely from being 50%-owned by the world's largest brewer, Anheuser-Busch. Building up its export presence through the Coca-Cola network may be a novel way for a beer company to expand but in Latin America it could be a viable approach.

The key to FEMSA's ability to piggy-back its beer brands on Coca-Cola FEMSA's distribution will therefore rest on its relationship with The Coca-Cola Company. With the deal, Coca-Cola has increased its share in Coca-Cola FEMSA from 30% to 39.6% and will want nothing to cloud the focus of its bottler network.

However, as part of the deal, FEMSA has reportedly agreed with Coca-Cola a deal whereby opportunities to integrate its beer brands into the distribution companies will be assessed on a market-by-market basis.

One of the prime markets where this would be attractive to FEMSA would be Venezuela where there is plenty of growth potential in the beer sector and the country's distribution system lends itself well to the combination of beer and soft drinks. Most crucially, the combination of Coca-Cola FEMSA's existing bottling operation and Panamco in Venezuela means Coca-Cola FEMSA will be the only Coke bottler in the country, giving it significant muscle.

Other integration opportunities will no doubt be assessed in due course but Coca-Cola FEMSA says the chief priority at the outset will be the integration of the two soft drinks companies.

The process of integration would logically begin in Mexico and Argentina which are the only two markets where both companies currently have operations. But a Coca-Cola FEMSA spokesperson told Just-drinks that the company was keen to bring its best practice to bear throughout the Panamco network.

The fit between the two companies in Mexico alone would present a very strong case for the merger. The company says it expects significant synergies to be achieved from the integration of the operations in its home market which will include manufacturing facilities, sales and distribution, corporate overheads, procurement and systems.

Coca-Cola FEMSA forecasts annual savings, two years after the completion of the deal, in the region of US$70m. The companies' combined volumes in Mexico in 2001 were 929m unit cases and Coca-Cola Femsa says there are "significant synergies" to be realised including "contiguous territories and overlapping structures" coupled with the increased scale.