The Many Mexican Standoffs

FILED JANUARY 6, 2010

There are a lot of moving parts between the sale of Femsa, the arbitration between AB InBev and Grupo Modelo, and the lawsuit between Modelo and Constellation, and they are all somewhat related. And don't forget Ambev there in the wings. With SABMiller and Heineken both in the running for either all of Femsa, or just Femsa Cerveza, what you have here are six of the top 10 global brewers involved in potential landscape shifting transactions, and they all have implications for the US beer business. After speaking with a few folks, mainly Carlos Laboy at Credit Suisse, here are some thoughts to think about:

As far as Modelo, the feeling on the Street is that one way or another, AB InBev will end up with the remaining 50% of Modelo. Carlos feels that there are opportunities for AB InBev to achieve significant synergies by closing several breweries and by streamlining management. As far as what happens to their stake in Crown, that will probably end up being a valuation and legal issue, including antitrust, and the chips will fall where they may.

As for Femsa, Carlos believes that the deal is SABMiller's to lose because whatever Heineken can offer, SABMiller can offer something better. But it's not that simple. If the Femsa controlling families only wish to sell their beer division, Femsa Cerveza, and keep the valuable Oxxo convenience store chain and Coke bottlers, then that not only makes it easier for Heineken to acquire (since it presumably can't afford all of Femsa), but it also makes it less attractive to SABMiller. Why? Because having Coke allows them to achieve synergies by selling beer and soft drinks together, and owning Oxxo helps them to protect the market shares of both. Then again, if Heineken can't afford all of Femsa, does it even work without having the Oxxo push and the Coke connection? Beyond Mexico, Carlos says the real plum prize of buying Cerveza is the entry it offers into the Brazilian beer market, and the buyer of Cerveza cannot easily do it without Coca-Cola Femsa in Brazil. So it's complicated. As far as what happens to Femsa's deal with Heineken USA if SABMiller wins the bidding, again that is a contractual and legal issue, and the chips will fall where they may.

These are tumultuous times in the Mexican beer market. Anything can happen.

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