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Heineken CEO’s Dos Equis Deal Starts Mexico Fight With AB InBev

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Heineken NV Chief Executive Officer Jean-Francois van Boxmeer, who yesterday won the auction for the Mexican brewer of Dos Equis beer, now will have to battle AB InBev NV in Latin America to make the purchase pay off.

With the $7.7 billion acquisition of Fomento Economico Mexicano SAB’s beer unit, Heineken takes on AB InBev in Mexico and Brazil, where the Belgian brewer controls 70 percent of the market. The challenge may soon be exacerbated because analysts expect AB InBev to buy the rest of Corona’s brewer, Grupo Modelo SAB de CV, to become the top beer maker in Mexico.

“Modelo in Mexico is already a very strong competitor, but the real danger is AB InBev coming in — you’ll see a change and it won’t be for the better for Heineken,” said Martin Dolan, an analyst at Execution Ltd. in London. “The Belgians’ cost- cutting business model is a world apart from others. Heineken can’t even pretend to take them on in Brazil.”

AB InBev will be financially able to buy the 50 percent of Modelo it doesn’t already own this year because its $52 billion acquisition of Anheuser Busch Cos. has reaped savings faster than expected, Sanford C. Bernstein’s Trevor Stirling estimates. The 50 percent stake is worth between $8 billion and $9 billion, according to Evolution Securities Ltd. in London.

‘Lots to Do’

AB Inbev’s Brazilian-born CEO Carlos Brito has said the company still has “lots to do” in the Americas region, including acquisitions. The Mexican controlling shareholders of Modelo had been willing to sell the company in 2008, Ernesto Alcalde, a former chief financial officer of the company, said last year.

“At Grupo Modelo, we are used to having strong global competitors,” spokeswoman Jennifer Shelley said in an e-mailed statement. She declined to comment on a possible acquisition by AB InBev.

Marianne Amssoms, a spokeswoman for AB InBev, declined to comment for this story.

Van Boxmeer, 48, has led Heineken in its two largest acquisitions in less than two years. In April 2008, he added Scottish & Newcastle to expand in the U.K. and is now moving to emerging markets with greater potential. Heineken’s proportion of sales from emerging markets will rise to 40 percent from 32 percent previously, the lowest of the world’s big four brewers, the company said.

Mexican Market

The Mexican market is forecast to grow more than 11 times faster than western Europe, where Heineken gets 50 percent of its sales. The all-stock purchase of Femsa, as the Mexican brewer is known, gives Heineken the second position in Mexico’s two-player market and third-place in Brazil.

Heineken’s shares rose 3.3 percent in Amsterdam yesterday, extending the 12-month gain to 40 percent. AB InBev’s shares rose 86 percent over the same period.

AB InBev inherited its stake in Modelo from Anheuser-Busch. The other shareholders include six Mexican families, and the remainder of the equity trades on Mexico’s stock exchange. There is ongoing arbitration between the companies, with Modelo seeking $2.5 billion in damages in a claim that originally sought to prevent Anheuser-Busch from selling its 50 percent stake in the company to the old InBev NV.

Amsterdam-based Heineken has prepared for the possibility that AB InBev could enter its new backyard in the near future, CEO Van Boxmeer told investors yesterday.

“I don’t think it would by definition be a bad thing for the market if ABI take ownership of that company,” he said. “We believe that it would help the market when the players start segmenting the market more instead of just copying each other and competing on price.”

Securing Growth

Heineken will initially focus on securing growth in Femsa’s “regional strongholds” in the north and south of the country, rather than winning market share in Modelo’s top areas. The company will take advantage of Femsa’s distribution network to push sales of its premium-priced Heineken brand in both Latin American markets, Van Boxmeer said.

“The Heineken brand may be able to take single-digit market shares in Mexico or Brazil, which is useful but hardly justifies” the price tag, said Execution’s Dolan. “If they cannibalize sales of the Femsa brands in the process, I don’t think they’ll mind.”

Femsa ceded market share to its sole domestic competitor in the third quarter, falling to 42 percent from 44 percent a year earlier as the northern Mexican region it dominates suffered the impact of the economic crisis. Modelo rose to 58 percent from 56 percent as the company increased the size of the bottles to win over drinkers.

Femsa’s Beer Unit

Femsa’s beer unit had sales of about $2.88 billion in 2008, with $2.16 billion coming from the Mexican market and the rest from its Brazilian operations and exports, mostly to the U.S.

Mexico is the industry’s fourth-most profitable market, with total sales of $15.6 billion last year, according to Euromonitor data. Domestic consumption will increase 11 percent from 2008 to 2015, Plato Logic Ltd., a beer industry researcher, has forecast.

In Brazil, which is almost double the size of the Mexican market by volume, Heineken faces the dual challenge of having a small market share at 9 percent, and being reliant on 19 separate Coca-Cola bottlers for distribution. Femsa’s local Coca-Cola bottling operations only account for 2 of the 19.

Amid plunging market share, Heineken in 2004 wrote off the value of its 18 percent stake in the unit to zero.

“We have a lot to do in Brazil, it’s a weak operation,” Van Boxmeer said. “It’s certainly not an easy position to operate from when you are No. 3.”

An AB InBev purchase would add to the challenge for Heineken, though Mexico will be “manageable” because of an exclusive distribution tie-up with Femsa’s Oxxo supermarket chain, Bernstein’s Stirling said.

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Tuesday, August 22, 2:57 pm

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