Brazil Meltdown Dims Outlook for Mexican Companies Like Slim's

  • America Movil, Coca-Cola Femsa, Mexichem see 'tough times'
  • Middle-class consumers in Brazil scaling back on spending

Mexican companies including billionaire Carlos Slim’s America Movil SAB are becoming the latest victims of Brazil’s woes.

America Movil, as well as bottler Coca-Cola Femsa SAB and petrochemical Mexichem SAB, have expanded into Brazil in search of growth beyond their home market. Now they’re feeling the pain as South America’s largest economy heads for its worst recession since the 1930s, causing middle-class families to scale back consumption on everything from soft drinks to pay-TV packages.

Brazil’s fast-growing middle class had appealed to Mexican companies, especially America Movil, which has been facing penalties set by regulators in Mexico for its dominance.

“Without a doubt it’s a country where it’s bet on growth, and in the meantime, the situation hasn’t been favorable,” said Montserrat Anton, an analyst at Invex Casa de Bolsa SA in Mexico City, regarding America Movil.

The Brazilian real dropped 1.7 percent to 3.8977 per dollar at Thursday’s close, down 32 percent this year and the lowest in 12 years. Brazilian bond and equity markets tumbled last week after Standard & Poor’s cut the country’s credit rating to junk with a negative outlook, meaning more downgrades could be on the way.

For Mexican companies, the spiraling currency means lower revenue. “There’s also a consumer that’s been clearly affected by the slowdown of the economy,” Anton said.

Consumer Spending

Slim’s America Movil, which makes about 21 percent of sales in Brazil, will probably see a smaller contribution from its biggest market by access lines this year, according to Anton. Movil disconnected more than 110,000 satellite-TV customers in Brazil with past due bills in the past quarter, she said.

Although the demand for mobile services keeps growing amid the recession, America Movil also offers landline telephone and pay-TV services as part of its bundled offers in the country. Brazilians love getting online and using social media, so if they need to reduce their telecommunications bills, they’re more likely to drop their landline or satellite-TV package.

An America Movil press official didn’t respond to requests for comment.

Coca-Cola Femsa, which invested about $2.3 billion in Brazilian bottlers in 2013 hoping to benefit from business around the World Cup, said 2015 would be “tough” as volume growth has dropped by more than anticipated.

The world’s largest franchise Coca-Cola bottler may see earnings before interest, taxes, depreciation and amortization, or Ebitda, lowered by as much as 7.3 percent this year, according to estimates from Banco Santander SA. 

“The company is exposed to material currency translation impact,” said Luis Miranda, an analyst at Santander, which downgraded Coca-Cola Femsa to hold from buy. “We expect weaker than originally anticipated volume in Brazil and Mexico, although this should be partially offset by better prices in local currencies.”

Despite these market conditions in Brazil in the first half of 2015, Coca-Cola Femsa is still gaining share in some categories, Roland Karig, the company’s investor relations director, said in an e-mailed statement. “We are confident of the Brazilian market,” he said.

Mexichem’s shares have lost 25 percent in the past year, followed by America Movil and Coca-Cola Femsa, which have both dropped 14 percent.

Brazil also poses a risk for Mexichem, as the current economic scenario is likely to worsen, Itau BBA SA said in a note last month. A company press official declined to comment.

Brazil, Mexichem’s largest Latin American market, is “going through tough times,” Chief Executive Officer Antonio Carrillo said in its last earnings call in July. “For the rest of the year, as I mentioned, our biggest concern continues to be the Brazilian economy.”

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