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SAB & Heineken in talks with FEMSA over possible sale?

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Fomento Economico Mexicano SAB, Latin America’s largest beverage company, said it’s in discussions “with several parties” regarding its beer business.

There are no assurances the talks will end in a definitive agreement, Femsa, as the Monterrey-based brewer and soft-drink producer is known, said today in a statement. It didn’t name any companies involved in the talks.

Femsa’s American depositary receipts trading in New York jumped 17 percent to $44.40 today after the Wall Street Journal reported the company is negotiating with SABMiller Plc and Heineken NV. The market capitalization of Femsa, the maker of Dos Equis and Tecate beers, was $15.9 billion at today’s close.

SABMiller and Heineken may be interested in buying Mexico’s second-largest beer company, one of a few large independent brewers left in the global industry, to enter one of the most profitable beer markets. Anheuser-Busch InBev NV was formed in December after Belgium’s InBev NV paid $52 billion for the maker of Budweiser.

“The idea is global scale in the beer business,” Mario Gabelli, chief executive officer of Gamco Investors Inc. in New York, said in an interview. “SABMiller realizes that with Anheuser-Busch Inbev, they may want to go to the next step.”

As of June 30, Gamco owned 649,900 of Femsa ADRs, according to data compiled by Bloomberg.

Nigel Fairbrass, a spokesman for London-based SABMiller, declined to comment. Veronique Schyns, a spokeswoman for Heineken, didn’t immediately return a phone message left after regular business hours in Amsterdam.

Profitable Market

Femsa was started by Monterrey’s Garza family in 1890. A merger could value the beer unit at $9 billion, the Journal said.

Mexico’s beer market is highly profitable because Femsa’s only competitor is Grupo Modelo SAB, the maker of Corona, said Jose Miguel Garaicochea, who helps manage 9.7 billion pesos ($705 million) of securities for the Mexican unit of Banco Santander SA. In 2008, Femsa’s beer unit had an operating margin of 13 percent. That compares with 26 percent for Modelo. SABMiller’s margin in the same period was 18 percent while Heineken’s was 8.3 percent.

“Distribution is very important as a barrier to imported beer,” Garaicochea said. “The channels of distribution help. The two big companies in Mexico have them completely under control.”

In the first half of this year, FEMSA had 42 percent of Mexico’s 30.8 million-hectoliter (813 million-gallon) domestic beer market. Modelo had the remaining 58 percent.

2005 Accord

Heineken has sold Femsa’s beer brands in the U.S. since 2005 under a commercial agreement. Femsa sought out Heineken as a partner after it purchased the 30 percent stake InBev owned in Femsa for $1.25 billion in 2004.

Femsa originally sold the stake to Canada’s Labatt Brewing Co. as part of a joint venture to sell beer in the U.S. The partnership soured after Interbrew, the forerunner to InBev, purchased Labatt.

Heineken and Denmark’s Carlsberg A/S jointly acquired Scottish & Newcastle, the Edinburgh-based maker of Foster’s beer and Strongbow cider, for 7.8 billion pounds last year and then broke the company apart. Heineken had costs of 757 million euros ($952 million) in February to write down British, Russian and Indian assets.

In August, SABMiller Chief Executive Officer Graham Mackay said his company has enough financial strength and investor support to make acquisitions. The company paid $5.6 billion for Miller Brewing Co. in 2002.

Unit Growth

Growth of Femsa’s beer business hasn’t kept pace with the company’s Coca-Cola and convenience-store units. In the first half of the year, the beer division had sales of 21.9 billion pesos, accounting for 24 percent of Femsa’s total revenue of 91.3 billion pesos. Coca-Cola Femsa SAB, which became the largest Coke bottler in Latin America with the $3.6 billion purchase of Panamerican Beverages Inc. in 2003, accounted for 51 percent of sales. Oxxo, Femsa’s convenience store chain, had revenue of 25.4 billion pesos.

Combining with a rival brewer would value Femsa at a higher price than the shares reflect, said Gerardo Roman, head of trading at Actinver SA, Mexico’s largest independent money manager.

“If you sum all the parts, they should be above market price,” Roman said.

To contact the reporters on this story: Thomas Black in Monterrey at tblack@bloomberg.net and Hugh Collins in Mexico City at hcollins8@bloomberg.net

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Monday, April 24, 3:12 pm

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