Latin Finance - March/April 2012 - 54

Mexico m&a

November the company struck an exclusivity agreement with Mexico-based Actinver analyst Karla Peña says she expects Coca-Cola to analyze the possible acquisition of a majority stake Arca Continental and Corporación del Fuerte could mark in Coca-Cola’s bottling operations in the Philippines. the year’s first link-up. This is because the former has a large Peña, who has a $141 objective price target on Coca-Cola chunk of Northern Mexico’s market, while the latter controls Femsa’s stock, says investors may view a Philippines incursion as Chihuahua, Sinaloa and Baja California, the other three too risky. This is especially true as the company has other options remaining large markets in the north. in more familiar territory in other parts of Latin America. For “A Continental, Corporación Fuente deal makes the most instance, Femsa could do well buying Chilean bottler Andina, sense,” Peña notes. “It will provide Continental with a bigger which has a big presence in Brazil, or one of the four bottling territory while reducing production and transportation units Coca-Cola is considering divesting in the US. expenses.” “I don’t think investors would like them expanding into Fernando Olvera, a Coca -Cola Femsa analyst with BBVA Asia very much,” Peña says. He adds that such a move could in Mexico City, agrees that an Arca Continental-Fuente combination may be on the cards but that a deal could take some negatively impact Femsa’s stock price. “They are a Latin American company with experience here so moving into another time to hatch. Fuerte has hinted it won’t sell cheaply. continent might be a bit risky operationally.” “Negotiations could stretch forever as both companies fight So far, however, credit analysts say Coca-Cola Femsa is over the best price to link their operations,” Olvera says. “These managing its acquisition spree companies [as well as other very well. Alonso Sánchez, Coke bottlers] have been KOF’s Debt Maturity Profile ($m) assistant vice president and negotiating potential mergers Comfortable refinancing needs ahead analyst at Moody’s corporate for years.” finance group in Mexico City, Olvera added price will be 600 says the company is at no risk a big issue in 2012 as many of of over-stretching itself or being the independent bottlers mull 500 vulnerable to a rating change, whether to sell or wait until which the agency has at A2. the global economy recovers 400 “They have a lot of to fetch a higher valuation for experience growing through their businesses. mergers which is a crucial “The bottlers that are left 300 part of their strategy,” he says. represent a small part of the “They have demonstrated distribution system,” Olvera 200 prudence in doing so, and I adds. “Some are struggling think they will continue to and are keen to sell but others 100 grow through M&A while may want to wait until global taking care of their credit economic conditions improve 0 standing.” before selling at a cheap price.” 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 According to Sánchez, CocaAt the same time, Coca-Cola Cola Femsa has 18.6 billion Femsa has indicated it won’t be Source: Coca-Cola Femsa pesos in cash,22 billion pesos in rushed into an expensive deal debt, and a debt/Ebitda ratio of one. as has Arca Continental. For this reason, Olvera said it may take “We would only downgrade them if they acquired a company 12 to 18 months before the remaining Coke bottlers join either team – unless the soft drinks market deteriorates further, but this so big that their debt-Ebitda ratio rises to 1.5 and stays like that for some time,” Sánchez muses. If the company’s Ebitda-interest is too early to predict, say analysts. expense ratio were to fall below six from 10.5 now, that could Regarding other potential tie-ups, analysts say Femsa and also trigger a rating change, Sánchez adds. Continental will seek to merge with the bottlers that are placed But that possibility seems unlikely, at least for some time, as closest to their operating markets to achieve greater economies analysts expect Coca-Cola Femsa’s Ebitda to continue rising as it of scale. expands its business across Latin America. Femsa, for example, could benefit from merging with Yoli Apart from Andina, Torres says Coca-Cola Femsa will de Acapulco, Embotelladora del Nayar, Corporación Rica, certainly be keen to eventually grow in Brazil. “The market is Embotelladora de Colima and Yucatán-based Bepensa, all of even more fragmented than in Mexico, so you have even more which border its market stronghold in Central Mexico and independently-owned bottlers looking to sell, which Coke Femsa Southern Mexico. For Arca Continental, Nogales, which is present in the northern state of Sonora, will make the most sense is probably looking at,” he says. LF after a Fuerte link-up.

Over-leveraging itself?

UPDATE
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Coca-Cola Femsa executives recently indicated the company is willing to consider acquisitions outside Mexico, and in late

54 LatinFinance

March/April 2012

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Latin Finance - March/April 2012

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