Stock price: €34,5 ($49.96 USD)
Conclusion: We reiterate our positive stance on Heineken (OTCQX:HINKF) following the acquisition of FEMSA Cerveza. We upgrade our valuation range up to €38-€41 per share.
Heineken acquires FEMSA Cerveza for €5.3bn EV ($7.6bn), including equity value of €3.8bn and net debt of €1.5bn.
We find this deal excellent for a number of reasons:
- First the price, at the low end of estimates range, which implies 11.2x EBITDA estimates, slightly below the valuation average of 11.5x recorded in previous deals.
- Second, its strategic benefits: the deal will increase Heineken’s exposure to Latin America (FEMSA Cerveza is number 2 in Mexico and number 4 in Brazil) and balance developed and emerging markets exposure. Emerging market will account for 40% of Heineken EBIT vs 32% currently. In addition, it will strengthen Heineken’s leading position in the profitable import and growing Hispanic segments in the US. Last, it will offer a new growth platform for the Heineken brand in the premium segment in Mexico and Brazil.
- Third, the way it is structured, 100% share based, allowing to maintain the net debt / EBITDA ratio largely unchanged at 3.1x. FEMSA will hold 12.5% of Heineken and 14.9% of Heineken Holding, representing a 20% economic interest in the Heineken group.
We expect the transaction to dilute EPS by around 4 and 2.5% respectively for 2010 and 2011 and start to enhance earnings by 2012 by +3+4%, assuming €150m synergies by 2013. Longer term, we estimate Heineken DCF based valuation at around €41-42 per share.
Following Monday’s strong positive reaction, we estimate that Heineken offers further upside of around 15% based on our revised valuation range of €38-€41 per share.
Disclosure: Long Heineken at time of writing.