Coca-Cola Femsa Takeovers Loom With Profits Eclipsed: Real M&A

Coca-Cola Femsa Takeovers Loom With Profits Eclipsed
Bottles of Coca-Cola soda move down a conveyor at the Coca-Cola Femsa SAB bottling facility in Toluca, Mexico. Source: Coca-Cola Femsa via Bloomberg

After sitting on one of Mexico’s biggest war chests, Coca-Cola Femsa SAB needs acquisitions more than ever as its main rival’s profit increases twice as fast.

Mexico’s largest Coke bottler has doubled its cash hoard in the past two years to $1.1 billion, more than all but two of the nation’s 27 consumer-goods companies, according to data compiled by Bloomberg. Coca-Cola Femsa has more cash versus debt than any time since 2002, when the Mexico City-based company announced its biggest takeover, the data show.

Coca-Cola Femsa hasn’t struck a deal greater than $100 million in three years and is losing ground after Embotelladoras Arca SAB agreed to buy Mexico’s third-largest bottler this year. Arca’s shares have gained about three times as much as Coca-Cola Femsa since the end of 2008. As Coca-Cola Femsa seeks takeovers, its finance chief says Arca’s deal may spur family-owned Latin American bottlers to sell. The company may also look at Chile’s Embotelladora Andina SA, according to Corp. Actinver SAB, or Coca-Cola Co.’s Philippines franchise, said JPMorgan Chase & Co.

“They have a large cash position and they want to use it for acquisitions,” said Jose Miguel Garaicochea, who helps manage about $1 billion, including Coca-Cola Femsa shares, in Mexico City for a Banco Santander SA unit. Arca’s takeovers put “pressure” on Coca-Cola Femsa, he said. “Obviously, one would want them to buy and buy cheap and that would help growth.”

Kent Landers, a spokesman for Atlanta-based Coca-Cola Co., declined to comment, as did Guillermo Garza, a spokesman for Arca. Veronica Diaz, with Embotelladora Andina, did not respond to a voice mail seeking comment.

Not Under Pressure

Coca-Cola Femsa isn’t under pressure to make acquisitions, said Jose Castro, the company’s investor relations chief. Larger acquisitions take a long time to negotiate, and Coca-Cola Femsa won’t be rushed into overpaying, he said. The company didn’t buy franchises in Ecuador and South Korea because of price, he said, declining to comment on future potential targets.

Coca-Cola Femsa’s cash and short-term investments increased to $1.1 billion as of March from $445 million at the end of 2008, data compiled by Bloomberg show. Its total cash is the most for any consumer-goods company based in Mexico after its majority owner Fomento Economico Mexicano SAB of Monterrey with $2.31 billion and the $2.27 billion held by Grupo Modelo SAB, the brewer of Corona beer, the data show.

“Investors and everyone are kind of waiting for something to happen,” Lauren Torres, an analyst with HSBC Holdings Plc in New York, said in an interview. “For them to be sitting on this cash and not putting it to good use does cause concern.”

Net Cash

Coca-Cola Femsa’s cash is projected to exceed borrowings by yearend, JPMorgan estimates. That would be the first time in eight years, just before the company completed its largest acquisition, data compiled by Bloomberg show. Net debt is currently $296 million.

In 2002 Coca-Cola Femsa agreed to pay $3.6 billion in cash for Panamerican Beverages Inc., then Latin America’s biggest soft-drink distributor with operations in eight countries in the region. The deal, which closed in May 2003, took four years to negotiate, said Coca-Cola Femsa’s Castro. The company also bought a Brazilian bottler in 2008 from Coca-Cola Co. for $364 million.

Shares of Arca, Mexico’s second-largest Coke bottler, have surged since it agreed in January to buy Tampico, Mexico-based Grupo Continental SAB for 27.7 billion pesos ($2.3 billion) in stock. Arca has risen 21 percent, outstripping Coca-Cola Femsa’s 3.8 percent increase. Mexico’s benchmark IPC index fell 6.3 percent in that span.

Profit Growth

Arca and Grupo Continental, commonly known as Contal, will form a bottler called Arca Continental that had $3.3 billion in combined revenue last year, according to data compiled by Bloomberg. Coca-Cola Femsa had sales of $8.2 billion in 2010.

Analysts estimate that Arca’s per-share earnings will increase 25 percent this year, versus 11 percent for Coca-Cola Femsa, using generally accepted accounting principles.

“Investors want to see them move this cash to do acquisitions and continue growing the business,” Karla Pena, an analyst with the Mexico City brokerage Actinver, said of Coca-Cola Femsa.

Arca’s Contal transaction adds to the two Argentine bottlers purchased in 2008 and the $345 million cash acquisition last year of a Coca-Cola franchise in Ecuador, which Coca-Cola Femsa executives said they had considered.

Shares of Monterrey-based Arca have climbed 191 percent since the end of 2008, almost triple the 64 percent gain for Coca-Cola Femsa.

Bill Gates

Coca-Cola Femsa is 54 percent owned by Fomento Economico Mexicano, known as Femsa, and the Coca-Cola Co. holds a 32 percent stake. The Bill Gates Foundation and Cascade Investment LLC, which manages money for billionaire Gates, own 8.7 million of Coca-Cola Femsa’s American depositary receipts as the top two investors in the U.S. shares, data compiled by Bloomberg show.

Embotelladora Andina, Chile’s largest Coca-Cola bottler, would be an attractive acquisition for Coca-Cola Femsa, according to Actinver’s Pena and Greenwood Capital Associates. The Santiago-based company, which has a market value of 1.54 trillion Chilean pesos ($3.3 billion), will post record profits this year and next, according to analysts’ estimates compiled by Bloomberg.

Brazil accounted for 46 percent of Embotelladora Andina’s sales last year, with 33 percent from Chile and 21 percent in Argentina, data compiled by Bloomberg show.

Chilean Bottler

“If I were them, I’d focus on what I know best, which is Latin America,” said Walter Todd, who helps manage $950 million at Greenwood Capital in Greenwood, South Carolina. “The Chilean bottler, the exposure that they have to Chile, Brazil and Argentina, it would be very good for them.”

Chairman Jose Antonio Fernandez said last year that Coca-Cola Femsa won’t limit its acquisitions search to Latin America.

Coca-Cola Femsa may seek to acquire Coca-Cola Co.’s North America bottling franchise, according to Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc., which oversees $3.6 billion. Coca-Cola Co. bought back the operations in October for about $12.3 billion.

“Coca-Cola Co. may name multiple partners in North America and Coke Femsa has to figure prominently in the list,” Carlos Laboy, a New York-based analyst at Credit Suisse Group AG, said in an interview.

Laboy said in a report to clients in October that Coca-Cola, the world’s largest soda maker, may ultimately break up its newly acquired North American bottling operations into four regional units and sell them. Coca-Cola Femsa would be a top candidate, according to the report.

Philippines Franchise

Buying one of the units could cost Coca-Cola Femsa more than $3 billion, if each is valued equally.

Coca-Cola Femsa may also consider buying Coca-Cola Co.’s bottling franchise in the Philippines, according to Alan Alanis, an analyst with JPMorgan in New York. In 2007 Coca-Cola Co. acquired the 65 percent of Coca-Cola Bottlers Philippines Inc. it didn’t own for $590 million from San Miguel Corp., valuing the entire operation at about $908 million.

“There’s an increased likelihood that they would have to go outside of Latin America to fulfill their acquisition plans,” Alanis said.

If Coca-Cola Femsa were to pursue all three potential acquisitions in Chile, North America and the Philippines, the total price tag would be more than $7 billion.

Latin American Bottlers

Coca-Cola Femsa Chief Financial Officer Hector Trevino said the Arca merger with Contal may prompt Coca-Cola bottlers in Latin America to explore selling.

“We will see a new wave of at least some curiosity from some of the owners to look at a potential transaction,” Trevino said in an earnings conference call April 27. “We’ll continue to be active.”

Bahl & Gaynor’s McCormick says Coca-Cola Femsa should return more cash to shareholders rather than pursue takeovers.

“They have a bunch of cash in their pocket,” he said. “Acquisitions are one of the alternatives that people like, but usually they take longer to impact the bottom line. Dividends would be their best bet.”

Coca-Cola Femsa has already increased its dividend 67 percent to 4.36 billion pesos ($370 million) this year. Trevino said last month that management would raise payouts if it can’t find any deals.

“They generate a lot of cash so investors want to see them move this cash to do acquisitions and continue growing,” Actinver analyst Pena said. “They simply want the money to be used somehow. If they see it’s not doing anything, then it can hurt the share price.”

Overall, there have been 9,601 deals announced globally this year, totaling $948.1 billion, a 21 percent increase from the $786.5 billion in the same period in 2010, according to data compiled by Bloomberg.

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