SABMiller likely to outbid Heineken for Femsa
October 5, 2009
By Andrew Cleary
SABMiller, the world's second-biggest brewer, would be able to use its stronger balance sheet to outbid Dutch rival Heineken in any showdown for the beer assets of Mexico's Fomento Economico Mexicano (Femsa), analysts said on Friday.
London-based SABMiller had more financing options available than Heineken because of its lower debt levels after sitting out last year's wave of consolidation, said analysts at brokers including UBS.
While SABMiller could conceivably fund an acquisition worth up to $9 billion (R68.4bn) through debt alone, Heineken would be forced to issue new shares that might jeopardise its family-controlled structure, UBS said.
SABMiller chief executive Graham Mackay said in August "nothing is stopping us from the right acquisition", adding that "there is money available" and investor support, even if the company turned to a rights issue.
SABMiller has net debt of 1.9 times earnings before interest, taxes, depreciation and amortisation, and has said it would stretch that to about 3 times for the right target.
"SABMiller management has been relatively outspoken about its appetite for mergers and acquisitions over the last six months," according to Melissa Earlam, an analyst at UBS in London.
"Given balance sheet constraints" at Heineken, "we believe SABMiller would be the front runner", she said.
Heineken faces more difficulty in raising money via a rights offer as "there is only a limited amount it can issue without the family losing control", Earlam added. The company's founding family owns a 50.1 percent controlling stake through Heineken Holding.
Veronique Schyns, the spokeswoman for Heineken, declined to comment, as did Nigel Fairbrass at SABMiller.
Femsa's Dos Equis and Tecate beer brands would give either company a ticket into one of the industry's most profitable markets in Mexico, as well as the opportunity to expand the international distribution of the two brands.
While the deal was a strategic fit for both parties, losing out would be a greater setback for Heineken, which was more reliant on a declining European market than any of its competitors, the analysts said.
"From a Heineken perspective, losing Femsa would close down one of its most obvious options to diversify away from low-growth Europe," said Trevor Stirling, an analyst at Sanford C Bernstein.
"Talk of a possible deal raises the spectre of overpaying for a perceived strategically important deal."
A $9bn price tag for the Femsa Cerveza unit, as cited in a Wall Street Journal report on Thursday, would be "quite full", said Earlam, who placed the unit's worth somewhere between $7.5bn and that figure.
SABMiller would struggle to repay the cost of capital by the fourth year, as was its stated policy, if it paid more than $7.5bn, she said.
SABMiller withdrew from bidding for the UK's Scottish & Newcastle last year when joint bidders Heineken and Carlsberg pushed the price too high.
The brewer instead kept debt low and bought up smaller assets from China to Africa and Poland, increasing its focus on emerging markets, where it generates about 85 percent of earnings.
Femsa might be better off selling the whole company, which included soft drinks and a retail unit, rather than selling off the beer unit which was "a mess", Credit Suisse's Anthony Bucalo said.
If the firm were sold whole, "the only two bidders who could afford it are SABMiller and The Coca-Cola Company, not Heineken," Bucalo added.
Any Femsa deal could also "put pressure" on Corona maker Grupo Modelo, the country's largest brewer, in which Anheuser-Busch InBev owns a 50.2 percent stake, said Ian Shackleton, an analyst at Nomura International.
"If Femsa loses independence, we see pressure on Modelo to follow."
Heineken chief financial officer Rene Hooft Graafland in August said the brewer would consider acquisitions outside mature markets after it had paid down more of its debt burden. The brewer, which has a profitable agreement to distribute Femsa beers in the US, was "always looking at opportunities", said Graafland.
"From a financial point of view, the Femsa deal wouldn't be good," said Robert Jan Vos at Fortis Bank Nederland.
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