Focus - A fight for FEMSA?
We can all breathe out again now. The economic downturn is over. What do we have as proof? Why, it's a reawakening of the mergers & acquisitions game.
The announcement late yesterday (1 October) that Mexico's FEMSA is in talks over its beer operations signals the opening movements of the first major acquisition battle in the global drinks industry since InBev acquired Anheuser-Busch last November for US$52bn. Since then, with the exception of the odd consolidation move or non-core divestment, drinks companies have been focusing more on weathering the storm as the credit bubble burst.
Okay, maybe we're getting ahead of ourselves in suggesting the announcement marks the arrival of the sun. Indeed, Mexico has long been seen as the next target market for the global brewers, with just-drinks predicting a fight over either FEMSA or Grupo Modelo in the country as far back as last December.
The aforementioned purchase of Anheuser-Busch set the stage nicely for a Mexican stand-off somewhere down the line. With A-B holding a majority - albeit non-controlling - stake in Grupo Modelo, things were always going to fall one way or the other. Either Modelo would fight against Inbev's influence - which still appears to be the case - or FEMSA would want to do something with its FEMSA Cerveza unit to counter the arrival of a beer superpower in its domestic market.
The Mexican company is a strong player not only domestically but across Latin America. While FEMSA Cerveza accounts for 43% share of the fourth largest beer market in the world, the parent company also owns the largest Coca-Cola bottler in Latin America in Coca-Cola FEMSA. Finally, FEMSA owns Mexican convenience store chain Oxxo, which has over 7,000 units and is growing at around 900 stores a year.
So, considering this strong overall position in the region, why should FEMSA entertain selling off its Cerveza operations. As one analyst puts it: "Well…why not?"
For a company like FEMSA to consider selling its beer assets, a combination of factors have historically been in place, namely: that there is a willing buyer making an attractive offer; the current owners have tried different strategies that have failed to markedly gain share or expand margins, and there are current or potential generational issues among the controlling shareholders.
"These factors are true for Cerveza," the analyst says. "SABMiller, Heineken and others have long expressed interest in acquiring these assets; Cerveza has not expanded its margins nor gained market share from Modelo in decades, even after several teams of managers have been at the helm, and FEMSA used to have five controlling families a few years ago. After two of the patriarchs have passed away in recent years, today the control group is comprised of more than 19 families. In our view, it would not be surprising that Cerveza, after almost 120 years of independence, may become part of a larger beer company."
The names in the frame, according to those close to the situation, are Heineken and SABMiller. "If FEMSA were to sell to SABMiller," another analyst notes, "this would significantly improve SAB's footing in Latin America. In the US, FEMSA has a ten-year() import arrangement with Heineken USA and SABMiller may well have to buy the brands out of this if they wanted to combine the FEMSA brands with the MillerCoors portfolio to give them extra scale versus ABInBev. That said, with 30% share already in the US SABMiller may just maintain the status quo to avoid anti-trust issues."
The same analyst adds that a sale to Heineken would solidify the US relationship, while giving Heineken a "more meaningful" presence in Latin America, a region where the Netherlands-based brewer is currently under-represented.
So, it certainly seems that some sort of transaction in Mexico's brewing arena is inevitable. While Modelo has been fighting the shift of Anheuser-Busch's stake to InBev, which has led to ongoing arbitration, it would appear the owner of the Corona beer brand has its hands full right now. This, then leaves the way clear for FEMSA to get a good price - thought by most analysts to be between US$8bn and $10bn - for Cerveza.
While the clouds haven't totally cleared, then, at least we have the likelihood of a colourful race for FEMSA's beer op's to look forward to.
Anheuser-Busch InBev has further improved its finances by issuing US$3.25bn in bonds....
Anheuser-Busch InBev is launching a global advertising and social media campaign to support Stella Artois' sponsorship of the 2010 Cannes Film Festival....
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