Adios FEMSA?
FEMSA Cerveza is one of the most talked-about acquisition targets in the
beer industry. News that management is exploring opportunities for its
brewing business has the beer industry M&A rumour mill turning
overtime. SABMiller and Heineken are seen as the most likely competing
bidders, but how much of a “must do” deal is it?
FEMSA is one of the last remaining independent brewers: FEMSA
management’s 1 October 2009 statement that “it is in discussions with several
parties to explore opportunities involving its beer business” is arousing substantial
interest among its international competitors. FEMSA Cerveza’s fate looks set to be a
driver of European brewing share prices for some time to come.
ABI has prompted FEMSA to re-appraise beer: A recent acceleration in the
pace of brewing consolidation and the creation of ABI has prompted FEMSA to reevaluate
its strategic position in beer. We believe the business faces a dismal
future as a standalone operation due to the increasing competitive threat from an
ABI-funded Modelo. Management should exit now to maximise value.
Mexico is not that attractive: The Mexican beer market is less attractive than
other emerging markets. Per-capita consumption is already higher than most
developing markets, and volume growth is forecast to compound at 2.6% to 2015E
(versus a 2.7% Latin American average). The market is heavily regulated and the
proliferation of exclusivity agreements is undermining operating margins.
FEMSA margins are weak and its market share is under pressure:
Adjusting for exclusivity agreements, FEMSA’s Mexican EBITDA margins are lower
than reported – 19.2% versus Modelo’s 31.6%; while EBIT margins at 13.9% are
half those of Modelo. Moreover, the group’s relative strength in beer strikes us as
overstated. FEMSA’s market share is under pressure from a more concentrated
and efficient Modelo. We estimate that FEMSA Cerveza’s market share (excluding
OXXO) would be as much as five points lower than reported. A lower exit multiple
than that of recent industry deals is appropriate in our view.
Integrating beers/soft drinks could create significant value: A big attraction
for prospective buyers of FEMSA is the possible upside from merging beer and soft
drinks distribution. This could deliver US$485-971m pa of additional savings in our
view. However, with The Coca-Cola Company yet to approve the move, SABMiller
and Heineken face the risk of tabling bids before any outcome is reached.
We value FEMSA Cerveza at US$7,449m: After adjusting FEMSA Cerveza’s
reported EBITDA for international accounting practice, we value the Mexican
business on an EV/EBITDA of 10.6x – in line Bavaria. We apply a 13.0x multiple to
the higher-growth export business and 14.0x to the short-term profit depressed
Brazilian assets. We value the total FEMSA group at US$22,245m - Ps72 per FEMSA
share.

Contents
Contents ...........................................................................................2
Executive summary ............................................................................3
What is FEMSA? .................................................................................6
The operations................................................................................6
The shareholding/ownership structure................................................7
Why might FEMSA exit beer now? .........................................................9
Who could be interested?...................................................................11
The attractions of Latin America ......................................................11
The potential acquirors ..................................................................12
The FEMSA Cerveza business .............................................................14
An overview .................................................................................14
FEMSA Cerveza Mexico......................................................................17
Projected beer consumption growth in Mexico ...................................19
Market structure ...........................................................................19
Mexican beer margins are structurally lower......................................21
FEMSA in Mexico ...........................................................................23
FEMSA Cerveza Brazil........................................................................30
The structure of the market ............................................................31
FEMSA and the Brazilian market ......................................................32
FEMSA Cerveza exports.....................................................................34
Other operations ..............................................................................36
Coca-Cola FEMSA..........................................................................36
FEMSA Comercio ...........................................................................38
Forecasting FEMSA Cerveza ...............................................................39
Valuing FEMSA.................................................................................41
Valuing FEMSA Cerveza..................................................................41
Appendix 1 ......................................................................................46
Cleaning up historical beer finanicals................................................46
Appendix 2 – Historic M&A multiples ...................................................47
Appendix 3 – FEMSA & Modelo financials..............................................48
Mexican and Brazil CPI...................................................................51
Appendix 4 – Comparing FEMSA/Modelo ..............................................52
Disclosures ......................................................................................54