Deutsche Bank analyst Jose Yordan believes Contal was a missed opportunity for Coca-Cola FEMSA

Deutsche Bank analyst Jose Yordan believes Contal was a missed opportunity for Coca-Cola FEMSA

The merger between Embotelladoras Arca and Grupo Continental (Contal) in Mexico represents a missed opportunity for Coca-Cola FEMSA, according to a Deutsche Bank analyst.

Reports last year suggested that Coca-Cola FEMSA was courting Contal. However, the bid was rejected and the firm reportedly began eyeing the purchase of Coca-Cola bottling plants in Canada.

In a research note yesterday (31 May), Deutsche Bank analyst Jose Yordan said that Contal was a missed opportunity but that it could end up have "a silver - or even gold - lining". The merger was finally completed today.

Coca-Cola FEMSA has always been quite open about its expansion plans. Early last year, group CEO Carlos Salazar Lomelin said the company was working on "rapid expansion", after reporting strong sales and profits for 2009.

Yordan said that recent comments by Coca-Cola FEMSA's CFO, suggested that the Arca-Contal merger "has at least piqued the curiosity of other privately-held bottlers in Mexico".

"We do not know how far this curiosity has gone, but if it goes well beyond having lunch with KOF (Coca-Cola FEMSA) management, the Contal "missed opportunity" could end up having a silver (or even gold) lining," Yordan said. "We have always been of the view that the best use of KOF's cash would be in consolidating the (still) highly fragmented central Mexico region, where there are at least three bottlers with contiguous (read high-synergy) territories. While we generally worry about "overpaying" for bottlers, this is the one situation in which we would accept and even welcome a deal above KOF's current multiple (within reason)."

While Chile's Embotelladora Andina has been suggested by some analysts as a possible purchase for Coca-Cola FEMSA, Yordan believes there are still other opportunities for the bottler.

"Aside from Andina, there is plenty of room for consolidation in Brazil, but with the same caveats as in Mexico (sellers not wanting to get out of business altogether, but also finding aminority stake in KOF as unacceptable), in our opinion," he said.

"Perhaps the most intriguing of possibilities is that of acquiring franchises outside of the company's core region. Over the last year-and-a-half much has been written about Coke FEMSA buying franchises in the Philippines, Canada and finally the US (on the premise that once The Coca-Cola Co is finished "fixing" the problems in the US that compelled it to acquire those assets from Coca-Cola Enterprises last year, it would then re-franchise those territories, in which case KOF would be a prime candidate)."

Yordan believes that Coca-Cola FEMSA's "inefficient balance sheet" is one indicator that conditions are positive for a large acquisition.