Monday, January 11, 2010

Heineken buys FEMSA's beer business

Heineken announced today that they have agreed to purchase FEMSA's beer business in the Americas. FEMSA ("Fomento Económico Mexicano, S.A.B. de C.V.") was founded in 1890, and is Mexico's #2 brewer after Corona-maker Grupo Modelo (the two are pretty much the only brewers in the country, other than a handful of microbrewers).  FEMSA as such is largely unknown among American beer drinkers, but is the brewer of beers like Dos Equis and Tecate, and Heineken USA has been their importer lately.

The purchase was an all-stock deal worth $5.5 billion, and leaves FEMSA owning 20% of Heineken. The only other serious bidder was SABMiller, and their stockholders are breathing a sigh of relief that there wasn't a bidding war. It appears to be a much better fit for Heineken anyway, getting them into the Americas in a big way.

What's this mean for you? Mostly nothing. I think it will have a net negative effect on consumers; prices will go up to pay for these purchases, and the closer we move to an oligopoly of beer -- mainstream beer, of course -- the easier it is to bump up prices. The more mainstream prices go up, the more room there is for craft prices to go up. However, SABMiller head Graham Mackay says it's a net positive, because consumers have more choice (a point I still don't get; more choice because more global brands that taste almost exactly alike have come to their country and are busily crushing the regional brewer?) and better quality (okay, that I can go along with in a strict sense). I'll freely admit that Mackay has much more experience in the biz (HA! Yeah, just a bit...) and is, by all evidence, head and shoulders smarter than I am, so he may have something there...but I suspect it's largely a matter of perspective.

Anyway...again, what's this mean for you? Almost nothing, especially in America. Heineken USA was importing the beers, they'll still be importing them; it's just that they'll also be exporting them at the same time. And, of course, the number of big brewers at the top grows smaller. Which is why I predicted in Ale Street News that within ten years ABIB would be spinning off and breaking up. I wasn't wholly serious about that, but to some extent I am. I don't think these behemoths are going to survive. Government anti-trust units should be poking at them (how much of the U.S. market is controlled by ABIB and MillerCoors?), special brewing units should spin off to run on their own in this new market, and eventually the bankers involved at the top will start acquiring other stuff because there are no more breweries to buy, and the company's identity will be lost -- like Bass -- and they'll start thinking about selling off the beer -- like Bass -- to focus on other operations. At least, that's what I think may happen.

In any case...Heineken USA is now in the import-export business.

12 comments:

sam k said...

With high-end major brands down last year (Heineken and Heineken Light [formerly Heineken Premium Light!?] were off big time)could this be a marriage of necessity, much like Miller Coors?

I see these kinds of moves as almost desperate, trying to shore up volum in companies losing market share despite their best efforts. Remember Stroh/Heileman? What brands are left of that fiasco that are available nationwide anymore?

I see the same long-term potential with shotgun weddings like this. I think your prediction for ABIB and the rest isn't going to be too far off.

Lew Bryson said...

No, actually, I doubt that. No one's doing this out of any desperation except the desperation of musical chairs. Heineken's in a much stronger position than Stroh's or Heileman was. They're looking at access to the Mexican and South American markets here, and that's going to be good for them, it's a hole in their global plan (and Heineken's pretty damned global already). I think what we're going to see is whether Graham Mackay or Jean-Francois van Boxmeer's vision is right: are you best taking on the global beer market with a fleet -- Miller, Pilsner Urquell, Castle -- or with one juggernaut -- Heineken/Amstel? We'll see.

jp said...

Growth over the long-medium term in brewing is coming from one place and one place only: emerging markets this is about South America and Mexico full stop.

Lew Bryson said...

Agreed, jp. People are saying that buying FEMSA is somehow going to help Heineken in the US...which is pretty much ass-backwards.

jp said...

As opposed to moving towards a break up or spin off, the counter move will be ABIB consolidating the 50% of Grupo Modelo it does not own, SAB will revisit Russia

Lew Bryson said...

My comments about break-ups and spin-offs are about post-endgame, jp. After everything gets consolidated, and these megabrewers have control of 75-85% of the world's beer market...how do they expand? They can't expand organically at the rates that these mergers have done. Looking at corporate arcs over the past leads me to believe that at that point, they will likely no longer be owned by brewers, or families with brewing roots, and that's when the conglomeration phase will set in, which will likely be followed by break-up. Ten years was too short a horizon, but that was what Ale Street set me, and I wanted to get it in.

jp said...

Oh sorry I did not know you said anything about breakups. As for the absence of families for investors I think that is a good thing, family ownership interest’s are rarely concerned with the interests of minority shareholders, nor will family controlled businesses be supportive of full disclosure to the detriment of minority shareholders or creditors. As for the product itself I think that depends: family control has not automatically equated to quality control on a mgt/operational level for a long time to. In some cases it surely does like Pernod Richard, Campari or Yuengling but in many cases families that retained their equity stakes have ceded to professional mgt a long time ago and are now happy to receive their dividends and watch from afar

Lew Bryson said...

We're looking at this from two different angles; you from a shareholder value perspective, me from a consumer value perspective. Sometimes those two jibe...not always.

jp said...

Well that is surely true ;-). Although just becuase you do not like the consumer value proposition does not mean there are not 10 other people who think it is the best thing since sliced bread, most likely the people they had in mind when they came up with it, otherwise it would disappear.

Lew Bryson said...

Hey, jp: I see FEMSA's stock dropped 13% on news of the deal. Is this because shareholders think selling the beer biz is a bad idea, or because they were hoping for a bidding war with SABMiller to drive up the price of the sale? Probably the latter? Just looking to learn.

jp said...

I am thinking the latter too, plus maybe the fact that it is an all stock deal that is, no cash consideration

jp said...

If SAB would of won they were supposedly going to give an all-cash offer which would of pushed Femsa up and the market seem to expect SAB to win (deeper pockets and the ability to put raise more debt to fund the transaction) so that was a surprise as well but yeah big drop on big volume