Femsa / Heineken Deal Good for Both Parties

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 |  Includes: FMX, HEINY
by: Chris Katje

Recently it was announced that Heineken (HINKY) would acquire the beer division of Mexican company Fomento Economico Mexicano, better known as Femsa. Femsa operates in three segments: Femsa Cerveza, Coca Cola Femsa, and Femsa Comerico. The company has been looking to get rid of the beer unit and has decided on Heineken as the suitor.

Heineken, long thought to be the second most likely acquirer behind SAB Miller, will acquire the company in an all stock deal and will take over all debt for this division that Femsa previously had. The all stock deal will make Heineken the second largest shareholder in Heineken, behind the family which still owns 50%. Femsa will own 20% of Heineken. The deal is valued at $7.6 billion including debt, which breaks down to two times 2008 sales for the unit.

What Heineken Gets From the Deal:

  • Heineken strengthens in the emerging Latin America market.
  • Heineken will begin making its flagship product directly in Mexico, which will increase production in Mexico and into United States
  • The number two beer company in Mexico, behind Groupo Modelo, which has a 43% market share in Mexico. Mexico is the number four country in beer profits in the World.
  • Makes Heineken a major player in Brazil. Brazil is the second largest beer market in terms of profits. Femsa had a market share of 9% in Brazil before the deal.
  • Heinken already imported Femsa Cerveza brands into the United States. Losing out on this deal would of potentially cost itself revenue down the road
  • Heineken will have 40% of its operations in growing markets after the deal
  • Two major deals in three two years, after its acquistion of Socttish & Newcastle in 2008, position the company across several continents with plenty of room for growth


What Femsa Gets From the Deal:

  • Femsa will own 20% of Heineken after the deal. This will be similar to how Altria owns part of SABMiller.
  • Femsa gains two board seats on Heineken
  • The ability to focus on two core groups: Coca Cola Femsa and Femsa Comerico.
  • The ability to borrow against ownership of Heineken for cash for acquisitions and Oxxo openings.

It appears as though Heineken is the biggest gainer here. Femsa gets what it wants out of the deal other than cash. Femsa will be opening Oxxo convenience stores at a pace of three per day in 2010.

I recently picked Femsa as one of my top ten stocks for 2010. I do not own stock in either company.

Disclosure: No positions