Heineken squares circle with FEMSA beer deal

January 11, 2010

Dutch brewer Heineken has managed a delicate balancing act in clinching the auction for the beer business of Mexico’s FEMSA. Despite outbidding SABMiller, the deal is in line with prices paid for growing Latin American markets. Meanwhile, Heineken’s all-share offer keeps debt under control while leaving its founding family in charge.

Heineken wanted the additional emerging market exposure offered by FEMSA. But because it’s still paying down debt from previous deals, it wasn’t in a position to offer cash. Investors feared Heineken would turn to them for fresh capital. But the FEMSA deal side-steps the issue.

Heineken is effectively issuing shares in both its operating company, Heineken NV, as well as its holding company, Heineken Holding, to pay for FEMSA. In return, the Mexican group gets a 20 percent economic interest in Heineken and two seats on the company’s supervisory board.

Meanwhile, the Heineken family keeps its grip on Heineken NV with a shareholding of just over 50 percent. And a five-year lock-up for FEMSA ensures stability on Heineken’s shareholder register.

The deal will catapult Heineken into the number two slot in Mexico — the world’s fourth-largest beer market by profits — and the number three position in Brazil, the second-largest market. The Amsterdam brewer also expects the deal to boost its imports into the United States and its position in the growing Hispanic market there.

This position does not come cheap. The enterprise value of $7.6 billion values FEMSA’s business at 11.2 times operating cash flow, which is in line with other emerging market beer deals, such as SABMiller’s purchase of Bavaria in Colombia. Nevertheless, the deal will not cover Heineken’s cost of capital for six years.

Moreover, the final price isn’t fixed. Heineken has to buy back 29 million shares over the next five years which will be handed to FEMSA. If Heineken’s share price continues to rise, so will the cost of the acquisition.

This deferred structure offers some insurance to shareholders: the final cost depends in part on whether Heineken delivers on its promises. Nevertheless, it is also a reminder that Heineken’s Latin American brew does not come without risks.

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