Heineken to buy Mexican brewer Femsa by issuing shares, company valued around $7.6B

Heineken to buy Mexico’s Femsa for $5.5B in shares

AMSTERDAM — Dutch brewer Heineken NV said Monday it will buy the beer-making operations of Mexico’s Femsa in an all-share deal that values the maker of Dos Equis, Tecate and Sol beers at $5.5 billion, excluding debt.

The buy increases Amsterdam, Netherlands-based Heineken’s presence in growth markets and cements its position as the world’s second-largest brewer by sales. It also continues a decade-long trend toward concentration among the biggest players in the global beer market.

Femsa Cerveza brands have a 43 percent market share in Mexico and a 9 percent share in Brazil — two of the world’s top four most profitable beer markets, and both still fast-growing. Femsa’s Tecate and Dos Equis brands are also significant players in the U.S. imported beer market, where Heineken vies with Grupo Modelo’s Corona.

“This is a really good deal for Heineken, for our position in the Americas,” Heineken Chief Executive Officer Jean-Francois van Boxmeer said on a conference call. “As a worldwide brewer, this was a (region) where we perhaps were weaker.”

Femsa Cerveza had sales of euro2.6 billion ($3.8 billion) and operating profits of euro618 million in 2008, Heineken said. Including debt that Heineken will assume, the deal is worth $7.6 billion (euro5.3 billion).

Analysts welcomed the buy as a pleasant surprise, given that many had expected SABMiller PLC — now the world’s third largest brewer by sales behind Anheuser-Busch InBev SA and Heineken — to win the race for Femsa.

Analyst Kris Kippers of Petercam Bank praised the deal as a “a great acquisition for Heineken” because Femsa was one of the few remaining large independent brewers in growth markets — and Heineken didn’t overpay. Heineken now has 40 percent of its operations in developing markets, up from 32 percent.

Heineken shares rose 3.3 percent to euro34 in Amsterdam, while SABMiller shares fell 2 percent to 1,801 pence in London. Femsa UBD’s shares were down 12 percent to 55.35 pesos on the Mexican Stock Exchange at midday.

Monterrey, Mexico-based Femsa — formally Fomento Economico Mexicano S.A.B. de CV — is one of Mexico’s largest conglomerates, bottling Coca Cola and operating the Oxxo convenience store chain throughout much of Latin America, among other activities.

The acquisition is Heineken’s second major buy in the past two years, as it bought Scottish & Newcastle operations worth euro10.2 billion in May 2008 to become the largest brewer in Britain and Europe.

In the same year, Belgium’s InBev bought Anheuser-Busch for $52 billion, while South African Breweries bought Miller for $3.6 billion in 2002.

“In the context of the reconfiguration of the global brewing landscape, scale and geographic diversification are more important than ever,” said Femsa CEO Jose Antonio Fernandez Carbajal on Monday.

“This transaction responds to that imperative.” He said the company would benefit from a clearer focus on its other operations and from its stake in Heineken.

Heineken said it expects the deal to close in the second quarter, pending approval from regulators and shareholders.

Under the deal, Femsa will take a 12.5 percent stake in Heineken NV and a 14.9 percent stake in its parent, Heineken Holding NV.

Those shares are valued at $5.5 billion, and Heineken is assuming Femsa debt and pension obligations of $2.1 billion.

Heineken’s unusual holding structure allows descendants of the Heineken family to control Heineken NV, and the company said Monday they have agreed to the deal. A trust holding 39 percent of Femsa shares has also agreed, Heineken said.

Heineken forecasts cost savings from combining the companies’ operations will amount to euro150 million per year by 2013. It said the acquisition will begin adding to Heineken’s per-share earnings “after two years.”

Analyst Kippers estimated the combined company is currently valued at 12 times its 2010 earnings, compared with an industry average of around 15 times.

He upgraded his rating on shares to “buy” from “add.”

Analyst Paul Curran of Euromonitor said the deal “remedies” Heineken’s over-exposure to low growth markets.

He also praised the all-share structure of the deal for “maintaining current debt levels that are still high after the Scottish & Newcastle” buy, at about 3 times operating earnings.

Heineken was the best-selling imported beer in the U.S. for years before being surpassed by Corona Extra — owned by Femsa’s larger Mexican rival Grupo Modelo — in the late 1990s.

The top two brands still account for more than 40 percent of the U.S. import market. Modelo Especial is in third place and Femsa’s Tecate in fourth. Corona Light, Dos Equis and Heineken Light are also among the top 10 imported brands, according to trade magazine Beer Marketer’s Insights.

Femsa is the second-largest brewer behind Modelo in Mexico, where it also sells Carta Blanca and Indio. Together Femsa and Modelo have an estimated 98 percent market share.

In Brazil, Femsa sells Kaiser, Bavaria Clasica and Xingu in addition to brands previously mentioned.

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Associated Press writer Catherine E. Shoichet contributed to this report from Mexico City.