• Heineken doubles Americas exposure
  • Analysts raise concerns on Brazil footing
  • Group aims to save EUR150m annually

Heineken has labelled its deal for FEMSA Cerveza as one of the biggest in the brewer's history, but analysts highlighted FEMSA's fragility in Brazil as a weak point in the agreement.

Heineken's share price rose by 6% to around EUR35 today (11 January) after the brewer surprised analysts by announcing it has beaten SABMiller in the race to acquire FEMSA Cerveza, Mexico's second largest brewer behind Grupo Modelo.

In return for yielding its independence, FEMSA will secure a 20% stake in Heineken in a deal valued at EUR3.8bn (US$5.5bn). The Mexican group cannot increase this stake further, under the terms of the agreement.

"It is one of the most significant deals in the history of the business," said Maarten Das, chairman of Heineken Holding, which holds the controlling stake in Heineken NV.

Jean-Francois Van Boxmeer, CEO and chairman of Heineken NV, told analysts in a conference call today that the deal will transform the group, largely by securing it a firm footing in the emerging Latin American market.

Heineken will gain FEMSA's 43% beer market share in Mexico, as well as a ten-year exclusive supply deal with FEMSA's convenience store chain OXXO, and will also strengthen its position in the US and Brazil. Those three markets account for 35% of the global beer industry profit pool.

Following the FEMSA deal, which Heineken expects to complete in the second quarter of 2010, the brewer will more than double annual earnings before interest and tax (EBIT) from the Americas region, from 11% to 24%.

It will also give Heineken global volume sales of 203m hectolitres, compared to 161m previously, and will mean that 40% of Heineken's annual EBIT comes from so-called emerging markets.

That aside, analysts gave Heineken a tough ride on Brazil, where Anhesuer-Busch InBev subsidiary AmBev is far and away the dominant player. FEMSA is number three with a market share of around 10%, but has struggled to make a profit in the country. Its weakness there was rumoured to be a reason for SABMiller walking away from the bidding table.

Van Boxmeer conceded today that number three "is not an easy position to operate from". But, with the beer market still growing, he added: "One has to say, with the price premium we have and position Heineken has, it is absolutely doable to be a profitable player."

Heineken plans to stengthen ties with Coca-Cola Co bottlers operating in Brazil, with a significant number owned by FEMSA's soft drinks arm, Coca-Cola FEMSA. Heineken's deal does not include Coca-Cola FEMSA, but it hopes to "leverage" close ties with the group.

Heineken said its position in Brazil "is strong enough and good enough to form a base in a market that is still growing".

Van Boxmeer and Heineken CFO Rene Hooft Graafland were forced to be similarly defensive regarding Heineken's position on debt and cost savings.

With the Netherlands-based brewer still digesting the remnants of Scottish & Newcastle, the group was keen to point out that the FEMSA deal will not increase its net debt to EBITDA ratio from the 3.1 reported last June.

Heineken also expects to realise EUR150m in annual cost savings by 2013, with Graafland insisting that the brewer "always delivers" at or above its projections.

Shares in SABMiller slipped 2% today after news that the brewer had missed out on a deal for FEMSA. Unconfirmed reports said the brewer walked away from a deal, despite its strong balance sheet seeing it named as the frontrunner by many analysts.