While Coca-Cola FEMSA is currently Mexicos largest bottler, this title looks set to be challenged

While Coca-Cola FEMSA is currently Mexico's largest bottler, this title looks set to be challenged

The merger of Embotelladoras Arca with its Mexican rival, Grupo Continental (Contal), has given rise to speculation that Mexico's largest Coke bottler, Coca-Cola FEMSA, faces a sterner test in its own backyard.

Last week, the creation of Arca Continental was approved by Arca and Contal shareholders. The move was originally announced in January, and annual sales of the new entity are estimated at around 1.2bn unit cases, making it the second largest bottler in Latin America.

Analysts estimate that Arca's earnings per share will increase by 25% this year, versus 11% for Coca-Cola FEMSA, according to Bloomberg.

Its report claimed that the merger could put Coca-Cola FEMSA under greater pressure to complete acquisitions, in order to maintain its strong position in the market.

However, not everyone is of the same opinion. One Mexican analyst that requested to remain anonymous told just-drinks yesterday (25 May) that, in terms of competition, Coca-Cola FEMSA is unlikely to have any concerns over the Arca and Contal merger.

"They are in different places in Mexico and abroad," the analyst said. "In the case of Arca, it has operations in the north of Argentina while Coca-Cola FEMSA has operations in other regions like in the south [of Mexico], so between them there won't be any problems with competition because both are in the Coca-Cola system."

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.

"We continue to look at alternatives and always have our eyes open," he told analysts. "We will see opportunities outside of America. We have the door open."

The last major acquisition for Coca-Cola FEMSA was Brazilian bottler Refrigerantes Minas Gerais (Remil), which it bought in June 2008 for $364.1m. Prior to that, and back in 2002, the firm paid $3.5bn for Panamerican Beverages.

While there is no rush at the present time, the analyst told just-drinks that Coca-Cola FEMSA likely still has acquisitions on the mind.

"We might see something in the near to medium term," he said. "The company is interested in acquisitions and I can tell you that the most probable deal will be in Latin America because of its operations and that more than half of its revenues come from Latin America."

Outside of Latin America, the analyst suggested that the company might look to the US or Africa.

"It depends on the opportunity," the analyst said. "If they have one in Africa and that opportunity is huge, I don't think the company will pass that up." In Latin America, he cited Chilean bottler Embotelladora Andina as a possible target, alongside a long tail of small, largely family-owned bottlers.

Coca-Cola FEMSA made clear last year that it has the cash and low debt level to pursue acquisitions.

If anything Coca-Cola FEMSA's own shareholders might apply more pressure than the new-look Arca Continental, if the drinks bottlers continues to sit on its cash.