Coca-Cola Femsa to Buy Bottler Cimsa for 11 Billion Pesos

Coca-Cola Femsa SAB, Latin America’s largest Coke bottler, said it will account for half of Mexico’s Coca-Cola sales after completing an agreement to buy the bottling operations of Grupo Cimsa with new shares.

The transaction, valued at 11 billion pesos ($837 million) in stock and assumed debt, tops the acquisition of Mexican bottler Grupo Tampico for 6.55 billion pesos of shares and 2.75 billion pesos of debt announced by the Mexico-City based company in June. Tampico was Coca-Cola Femsa’s largest purchase since it bought Panamerican Beverages Inc. for $3.6 billion in 2003.

The acquisition announced yesterday of Cimsa, a closely held company that sells Coca-Cola products mostly in the central states of Morelos and Mexico, marks the second transaction this year in which Coca-Cola Femsa offered shares instead of cash. That’s designed to reduce resistance by family-owned companies to sell out and exit the soft-drink business completely.

The consolidation of Coke bottlers in Mexico “is likely to continue as third-generation owners of smaller Coke bottling operations swap their controlling equity stakes for minority positions in a larger bottler,” Alan Alanis, a New York-based analyst with JPMorgan Chase & Co., said in a report today.

Coca-Cola Femsa rose 1.89 pesos, or 1.5 percent, to 124.87 pesos in Mexico City trading at 12:05 p.m. New York time. The shares gained 20 percent this year before today.

The agreement with Cuernavaca, Mexico-based Cimsa “confirms that our company represents an attractive, transparent and diversified investment vehicle for families that have been in the beverage industry for a long time,” Chief Executive Officer Carlos Salazar said in a statement.

Mexico Consolidation

The Cimsa and Tampico transactions follow the merger, completed in June, of Mexico’s second-largest and third-largest Coke bottlers to form Arca Continental SAB. There are now eight family-owned Coca-Cola bottlers left in Mexico that may be targets for Coca-Cola Femsa or Arca Continental, said Alanis, the JPMorgan analyst. He rates Coca-Cola Femsa “neutral.”

Shareholders of Cimsa, whose bottling operations are called Corporacion de los Angeles SA, will receive 75.4 million newly issued Coca-Cola Femsa shares valued at 118 pesos each, the companies said yesterday. Coca-Cola Femsa will absorb net debt of 2.1 billion pesos.

Cost Savings

Cimsa, which also has operations in the states of Guerrero and Michoacan, is forecast to sell 159 million unit cases this year, Coca-Cola Femsa said. A 13.2 percent stake in Promotora Industrial Azucarera SA, a Mexican sugar company, is included in the acquisition. Cimsa’s bottling unit is forecast to have 2011 revenue of 4.79 billion pesos and earnings before interest, taxes, depreciation and amortization -- a measure of cash flow known as Ebitda -- of 1.1 billion pesos, Coca-Cola Femsa said.

The 2011 estimated Ebitda margin for Cimsa is 23 percent, higher than 20 percent for Coca-Cola Femsa in this year’s first half, Luis Miranda, an analyst at the Mexican unit of Banco Santander SA, wrote in a report today. He recommends buying Coca-Cola Femsa shares.

“We view this news as positive,” Miranda wrote. “The operation is accretive from the operating side.”

The company expects to achieve annual cost savings of more than 260 million pesos from Cimsa’s bottling unit because it touches Coca-Cola Femsa’s territories on three sides, Hector Trevino, the company’s chief financial officer, said in a telephone interview. The amount of “synergies” allowed the company to pay 10 times annual Ebitda, compared with 9.6 times for Tampico, he said. Cost savings with Tampico will be in a range of 180 million pesos to 270 million pesos, Trevino said.

‘Very Achievable’

“We’re very sure that the 260 million pesos of annual synergies is very achievable and perhaps a bit conservative because of the proximity,” he said.

After the issue of new shares for the acquisition, Cimsa will own 3.8 percent of Coca-Cola Femsa. Coca-Cola Co.’s stake in the company will drop to 29.4 percent from 30.6 percent and Fomento Economico Mexicano SAB will have about 50 percent, down from 51.9 percent. Tampico will hold 3.2 percent, and the remaining 13.6 percent of the shares trade publicly.

Cimsa operates three bottling plants and 18 distribution centers and has 4,600 employees.

Coca-Cola Femsa and Cimsa will seek shareholder approval in special meetings. The transaction also requires approval from Mexico’s antitrust agency and Coca-Cola Co., according to Coca-Cola Femsa’s statement. Coca-Cola Femsa will hold a conference call tomorrow at 11 a.m. New York time to discuss the deal.