By Andrew Cleary
Jan. 11 (Bloomberg) — Heineken NV agreed to buy the beer division of Fomento Economico Mexicano SAB, producer of Dos Equis and Mexico’s second-biggest brewer, in an all-stock deal valued at 5.3 billion euros ($7.7 billion) to tap faster sales growth in Latin America.
The Amsterdam-based brewer will issue new shares to give Femsa a 20 percent stake in Heineken Group, the company said in a statement on its Web site today. Heineken rose 3.3 percent in Amsterdam trading, the most since Dec. 4.
The acquisition gives Heineken one of only two beer makers in Mexico, the world’s fourth-most profitable market, and reduces the company’s reliance on slower-growing European markets. Heineken, which distributes Femsa beers including Dos Equis in the U.S., expects savings of 150 million euros a year by 2013 and said it will use the acquisition to sell Femsa brands in Europe and Heineken in Latin America.
“This looks like a very clever deal from Heineken’s point of view,” said Nomura International Plc analyst Ian Shackleton. “It potentially opens the door for the whole of the Americas, a door which appeared to have closed.”
The world’s largest brewers have spent the last decade snapping up assets outside of western Europe as beer consumption in the region slowed. Anheuser-Busch InBev NV’s predecessor, Interbrew SA, bought Cia. de Bebidas das Americas in 2004 to become Latin America’s biggest beermaker. SABMiller Plc acquired Bavaria SA the following year to expand in Colombia.
The volume of Femsa beers sold by Heineken to retailers in the U.S. rose in the third quarter as the Dutch company’s total volumes in the Americas region fell 9.6 percent. The Americas generated about a fifth of Heineken’s earnings before interest and taxes last year and 11 percent of sales, compared with the 50 percent of sales coming from Western Europe.
Today’s deal values Femsa at around 12 times 2009 earnings, according to Evolution Securities Ltd. in London. That compares with the 14 times earnings Heineken and Carlsberg A/S paid for the U.K.’s Scottish & Newcastle Plc in 2008, and the 10.6 times multiple SABMiller Plc paid for Colombia’s Bavaria.
“This deal rebalances our portfolio of businesses more towards emerging markets and that was needed,” Chief Executive Officer Jean-Francois van Boxmeer said in a telephone interview. “Femsa has a fantastic distribution machine and we will use that to build the Heineken brand there.”
Heineken shares rose 1.075 euros to 34 euros in Amsterdam, the biggest gain in the Dutch benchmark AEX Index. Femsa fell as much as 14 percent in Mexico City, the most in almost a decade, after investors expressed disappointment with the sale price of its beer unit.
Heineken beat off competition for the unit from SABMiller, which pulled out of the bidding after deciding that the unit wasn’t worth more than $7 billion, a person with knowledge of the talks said yesterday. There may be “some relief” among SABMiller shareholders that the company “has not gotten into a value-destructive bidding war,” Evolution analysts said today.
“This was a must-have deal for Heineken, more so than for SAB,” Andrew Holland, an analyst at Evolution in London, said in an interview. “They needed a bold move, and this shows a greater degree of confidence at the company,” after it missed out on Bavaria to SABMiller, Holland said.
Heineken will issue 86 million new shares to Femsa on closing and an additional 29 million shares within five years. Debt and pension obligations of $2.1 billion are included in the purchase price. The transaction allows the Dutch brewer’s founding family to maintain their controlling stake, and will boost Heineken’s earnings per share after two years.
The ratio of net debt to earnings before interest, taxes, depreciation and amortization will be largely unchanged at 3.1 times, the company said. Femsa will be able to appoint two members to Heineken’s supervisory board.
Femsa had beer sales of about $2.88 billion in 2008, with $2.16 billion coming from the Mexican market and the rest from its Brazilian operations and exports, mostly to the U.S. The company’s worldwide sales in 2009 probably came to $15 billion, of which about $3.6 billion were derived from beer, according to JPMorgan Chase & Co. analyst Alan Alanis.
Femsa ceded market share to its sole domestic competitor Grupo Modelo SAB in the third quarter. Modelo, which is half owned by Anheuser-Busch InBev, increased its share of the beer market to 58 percent from 56 percent a year earlier, while Femsa said its share fell to 42 percent from 44 percent.
Femsa will “focus our attention” on the “significant growth opportunities” for its Coca-Cola Femsa SAB soft drink unit and Oxxo supermarket chain, Chief Executive Officer Jose Antonio Fernandez said in a statement. Heineken signed an exclusivity agreement with Femsa for Oxxo to distribute the Mexican and Heineken brands until 2020, Van Boxmeer said.
Heineken has the opportunity to raise prices in Mexico by introducing brand segmentation, CEO Van Boxmeer said. Femsa’s Dos Equis and Sol brands have strong potential in Europe and the U.K., while the company has “a lot to do” to turn around Femsa’s “weak operation” in Brazil, where Heineken will “play a value game, rather than a volume game,” he said.
Femsa was started by Monterrey’s Garza family in 1890. Chief Executive Officer Jose Antonio Fernandez is married to the daughter of Eugenio Garza, a patriarch of the business who died in 2008 at age 84. The controlling group has increased to more than 19 families from five just a few years ago, JPMorgan’s Alanis has said.
Credit Suisse AG acted as sole financial advisor to Heineken NV. Allen & Company, N M Rothschild & Sons Ltd., and Rebecca Miller acted as advisors to FEMSA.
To contact the reporters on this story: Andrew Cleary in London at email@example.com.
Last Updated: January 11, 2010 12:39 EST