KOF Merger Maintains Consolidation Trend

Coca-Cola Femsa (KOF) and regional Mexican Coca-Cola bottler Cimsa have agreed to a share-swap merger valued at MXP11bn ($831m), in KOF’s latest cashless combination with a smaller peer. The move is part of a broader consolidation in the sector that is likely to continue, analysts say. Cimsa owners will get 75.4m new KOF shares, and KOF will assume MXP2.1bn in Cimsa debt. The shift from traditional cash buys to share exchanges has changed consolidation in the historically fragmented industry, says a Mexico City-based beverage analyst, pointing to the fact that KOF has a strong balance sheet and could have done a much larger deal. “Once you allow smaller bottlers to continue to participate in the growth of the system, consolidation is a lot more dynamic. That’s the fastest way for Coke Femsa to consolidate the sector,” he says. For smaller companies, he adds, such mergers are preferable to being acquired outright. A US-based analyst spots the “takeout multiple” of the transaction’s combined entity at about 10x enterprise value/Ebitda, compared to 9.6x for Femsa’s June MXP9.3bn acquisition of Grupo Tampico, and in line with the trend for this type of deal. Though KOF’s investors may prefer cash buys instead of transaction that potentially dilute share holdings, KOF’s choice may be the best way forward, says the analyst. More transactions could be on the way. KOF now has about 50% of the Coca-Cola bottling market in Mexico, with Arca capturing 30% and the rest going to independent bottlers. This market offers numerous opportunities for profitability and growth and the Cimsa deal was generally a “very positive transaction multiple for KOF,” says a second analyst. Further mergers could come as soon as in the next 6-12 months, he notes, with independent bottlers in the center and north of Mexico high on the list of potential partners. Family-owned Cimsa operates in the states of Morelos, Mexico, Guerrero and Michoacan. Deloitte Galaz, Yamazaki, Ruiz Urquiza acted as finan