Gates Favors Coca-Cola Femsa After Parent Sheds Beer
Coca-Cola Femsa SAB, the largest Coca-Cola bottler by volume, is outpacing parent Fomento Economico Mexicano SAB by the widest margin in five years as Bill Gates and other investors seek more exposure to developing nations.
Coca-Cola Femsa had risen 15.5 percent this year in Mexican trading, compared with 6.4 percent for Femsa, also owner of convenience-store chain Oxxo. Femsa has fallen short since Chief Executive Officer Jose Antonio Fernandez sold its Mexican brewing unit to Heineken NV this year in exchange for a 20 percent stake in the Amsterdam-based beermaker.
In shedding the century-old family beer business, Fernandez made Femsa less focused on developing countries, making the bottler a better prospect for investors targeting faster-growing economies, said Vontobel Asset Management analyst Donny Kranson. Fernandez, who runs both companies, said the sale of the beer business to Heineken will allow Femsa to focus on building out Oxxo and the bottler operations.
“Femsa beforehand was pretty much a pure-play, emerging- market company,” said Kranson, whose New York-based firm manages about $10 billion and owns shares of Femsa and its Mexican cola bottler. “From an emerging-market perspective, Femsa is now less attractive.”
The Bill Gates Foundation and Cascade Investment LLC, which manages money for billionaire Gates, bought the bottler’s U.S. shares in May and June to boost combined holdings to 28 percent, according to regulatory filings. Gates failed to add to his 13 percent stake in Femsa’s U.S. shares over that period. Michael Larson, who runs both firms from Kirkland, Washington, didn’t respond to requests for comment.
Coca-Cola Femsa had a market value of about $14.7 billion. Femsa’s was $19.2 billion, which includes a 54 percent stake of Coca-Cola Femsa valued at $7.9 billion, a 20 percent stake in Heineken valued at $6.1 billion and the Oxxo chain.
Juan Fonseca, chief of investor relations for Femsa, said he recognizes the parent company is trading below the value of the sum of its parts.
“It is not our role to suggest what the right valuation should be for our company,” Fonseca said in an e-mailed response to questions. “That is up to investors to decide.”
Coca-Cola Femsa and Femsa had traded in lockstep for the past five years through the end of 2009, with a rate of return that differed by only 4 percentage points as the stocks both more than tripled. This year, Coca-Cola Femsa has risen 9 percentage points more than its parent.
Femsa rose 16 centavos to 66.66 pesos in Mexico City trading at 4:01 p.m. New York time. Coca-Cola Femsa fell 1.66 pesos to 99.41 pesos. Deutsche Bank AG analyst Jose Yordan cut his recommendation on Coca-Cola Femsa to “sell” from “hold” in a report today on concern over increased costs for sugar and corn sweetener.
Coca-Cola Femsa is outperforming its parent because the company probably will grow through acquisitions and partnerships with the Coca-Cola Co., said David Winters, CEO of Wintergreen Advisers LLC in Mountain Lakes, New Jersey, an investment firm that manages about $1.8 billion. Coca-Cola Femsa became the world’s largest franchise for the beverage after Coca-Cola Co. bought its North American bottling operations this month.
Coca-Cola, based in Atlanta, is likely to choose the Mexican bottler as a partner to run the North American operations, according to Credit Suisse Group AG analyst Carlos Laboy. The two formed a partnership to sell non-carbonated drinks in Latin America with the purchase of Mexican juice producer Jugos del Valle in 2007. They also may expand the partnership by agreeing to buy Grupo Industrias Lacteas, a milk, yogurt and juice maker in Panama, Coca-Cola Femsa said Oct. 14.
Femsa will keep trailing Coca-Cola Femsa since investors tend to apply discounts to holding companies, said Luis Miranda, an analyst with the Mexican unit of Banco Santander SA. Femsa trades at 25 percent less than the value of its holdings, said Miranda, who cut his recommendation on Femsa to “hold” from “buy” in an Oct. 5 report. He raised his recommendation for Coca-Cola Femsa to “buy” from “hold.”
The discount may present a buying opportunity as investors begin to realize the growth potential of Oxxo, Winters said. In the past five years, Oxxo’s operating income has risen almost fivefold to 4.56 billion pesos ($360 million) in 2009, while the beer unit’s profit rose 24 percent to 5.89 billion pesos.
The company is expanding the chain in Colombia and has said it will increase stores in Mexico to 12,000 by 2014 from about 7,300 at the end of 2009. The moves may help investors see beyond Femsa’s holding company status, Winters said.
“People don’t quite appreciate what a great accomplishment Oxxo is,” Winters said. “That business in the long term could have legs beyond Mexico.”
Femsa reported net income of 29.2 billion pesos in the second quarter, an increase of more than tenfold, because of a 26.5 billion peso gain from the Heineken transaction. Coca-Cola Femsa had net income of 2.48 billion, a 15 percent increase from a year ago. The companies are both scheduled to report third- quarter results this week.
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