Latin Finance - May/June 2010 - 25

femsa interview

On the Acquisition Trail
by Ben Miller fter months of discussion and market speculation, Femsa, then the second-biggest brewer in Mexico, agreed in January to swap its Femsa Cerveza beer unit for 20% of European brewer Heineken, a deal valued at $7.6 billion. The sale frees up cash that could be used to buy assets or repurchase local bonds. The move is a shift for Monterreybased Femsa, which is left with its exemplary beverage and quickly-growing convenience store businesses. It moves out of day-to-day operations of its original beer business, which accounted for a little bit more than a third total 2009 Ebitda. In 2009, Femsa, rated Aa1/AAA on a national scale, had revenue of 197 billion pesos and Ebitda of 27 billion pesos, up from 168 billion pesos and 32 billion pesos in 2008. Heineken, which already distributed Femsa brands, such as Dos Equis in the US, will be issued 86 million Femsa shares on closing and deliver an additional 29 million over a five-year period. The Dutch brewer will get 100% of the Mexico operation and the 83% it does not already own of Femsa’s Brazil beer business. The transaction got approval from Mexican regulators at the end of March. It is a strategic move for both. Heineken calls Brazil and Mexico the world’s second and fourth largest beer profit pools, respectively. Femsa can meanwhile hand over day-to-day operations of the beer business to concentrate on its Oxxo convenience store chain and the CocaCola bottler it controls. Allen & Company, Rothschild and Rebecca Miller advised Femsa, while Credit Suisse and Citi helped Heineken. Perhaps the biggest post-sale change for Femsa– historically one of the frequent blue-chip issuers in Mexico’s domestic debt market – is more cash and less need for debt.

Fresh off of the sale of its beer unit, Femsa is focused on more cash-generating businesses. It also has money free for potential acquisitions and buybacks.
“The balance sheet will be very clean,” Gerardo Estrada, Femsa’s corporate finance director, tells LatinFinance. “We will have more cash than debt,” adds Estrada, speaking in late February. Femsa was 0.82 times levered and had 17.64 billion pesos in liquidity at the end of calendar 2009. Estrada says Femsa was in the middle of marketing a new domestic bond deal when the Heineken agreement was reached. After cancelling that deal, Femsa will now be a less frequent issuer, as it focuses on growth at remaining businesses. The priority is putting proceeds to use in its remaining businesses. relations director Juan Fonseca says acquisitions are not out of the question. It could also see more international expansion, and already operates in Colombia. There are many bottlers operating in areas of Mexico and Brazil where CocaCola Femsa does not operate, Fonseca adds. He says bottlers outside Latin America offer possible targets, though they are not a short-term priority. Fresh financing in the local or international market is a possibility going forward, but Fonseca says Femsa will not need to be dependent on it for growth. The Coca-Cola Femsa unit, in which Coca-Cola owns a 31.6% stake, wooed high-grade investors in February to raise $500 million at a yield 55 basis points inside Mexico’s government curve. However, that was only its first visit to the DCM since 1996, according to company officials. Like the convenience store business, Coca-Cola-Femsa generates high cashflow and is seen as a relatively defensive sector, Fonseca says. He adds that it performed well during 2009. “If you look at our results you would never guess from the numbers that last year was such a critical year,” Fonseca says. Consolidated revenue grew 17.3% year-on-year in 2009. Fonseca says the transaction model used with Heineken – acquiring a smaller operation in exchange for Femsa shares – could be replicated with Femsa’s own targets, if it found, for example, smaller bottlers that wanted to be part of something bigger. LF

Cash for Acquisitions

Though the $7.6 billion deal was a share exchange, Heineken also agreed to assume Femsa Cerveza debt, which includes a piece borrowed at the holding company level, Estrada explains. Femsa gets about $700 million in cash to spend. “The preferred use is to make acquisitions,” Estrada says. “Absent any alternative to invest it, we will consider a public offer to repurchase the Mexican bonds issued by the holding company,” he adds. Femsa had 7.5 billion pesos in such certificados bursátiles outstanding as of February. As Femsa is a growth-oriented company, Estrada explains, cash would better be deployed to make acquisitions as it focuses on expanding Oxxo, and CocaCola Femsa, the bottler in which it has a 53.7% stake. Most of the growth at Oxxo thus far has been organic, but investor

May/June 2010

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Latin Finance - May/June 2010

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