Cross-border arbitrage is expansive Bimbo’s yeast

February 12, 2014

By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Cross-border arbitrage is the yeast for Grupo Bimbo’s aggressive expansion. In its latest deal north of the border, the acquisitive Mexican breadmaker is shelling out $1.8 billion to buy Canada Bread. Paying 20 times earnings to move into a mature market may seem questionable. But Bimbo’s earnings fetch an even higher multiple at home – and the deal should lower its weighted average cost of capital.

Excitement over Mexico and its expanding manufacturing base has fed the country’s stock market. The Bolsa has more than doubled over the past five years and even withstood the more recent emerging markets ructions. Grupo Bimbo has done even better, with its stock more than tripling. A rising middle class in Mexico means more demand for premium baked goods.

Meantime, a series of foreign acquisitions has added to the company’s growth – unbeknownst to most Americans, such breadbox staples as Thomas’ English Muffins, Arnold rye and Entenmann’s chocolate chip cookies are all made by the Mexican company.

So what’s the attraction of a company that has stagnant sales and a profit margin below 5 percent? Bimbo trades at 26 times estimated 2014 earnings. Investors may simply pay more for Canada Bread’s earnings rebranded under the Mexican company’s logo. While there’s little geographic overlap, there probably are some cost savings to be found and new products to be introduced. Bimbo, for example, has cashed in on rising demand for Mexican food, including tortillas, in the United States.

Rapid expansion brings risks, as other companies that have expanded cross-border have found out. Cemex, for example, gobbled up cement producers at breakneck pace until plummeting demand and hefty debt nearly sank the group during the financial crisis. But economic fluctuations have little effect on demand for bread, and even with this acquisition, Bimbo has kept its debt to a reasonable level of around three times EBITDA.

Moreover, expanding its business in predictable Canada means Bimbo will reduce its exposure to Mexico, which has a volatile financial history of ups and downs. That creates a financial synergy by lowering the overall company’s cost of capital. That should turn a seemingly expensive deal for a bland product into something more satisfying.

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