Femsa's recommendation has been cut following the company's decision to drop its injunction against Interbrew. Merrill Lynch analyst Robert Ford said yesterday that he had dropped the Mexican brewer and bottler to "neutral" from "buy."

Instead of continuing in the courts, Femsa will now pay Interbrew US$1.25 billion to repurchase the 30% stake in its US export brands, ending a partnership in which Interbrew subsidiary Labatt USA had been distributing Femsa's Sol and Dos Equis brands for nine years.

"We believe the report will disappoint the market," Ford said. "Recent bulls in the stock appear to have widely anticipated a near simultaneous announcement of a new strategic partner at a significant premium to FEMSA's repurchase price."

Femsa's new stock issuance will lead to a market overhang, Merrill said. "The transaction's suggested capitalisation also supports the view that Femsa is attempting to position itself as a universal beverage company, further frustrating many observers calling for a spin-off of Femsa's entire business over the near term," Ford warned.

While beer operations are currently "trending well," they are "somewhat eclipsed by the now greater importance of CSD bottling and adverse industry dynamics, particularly in Mexico, Colombia and Venezuela," Ford concluded.