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Send Your Portfolio To Happy Hour With These Beer-Loving Stocks

by Tony Daltorio, Investment U Research

After a decade of global consolidation, beer brewers have greedily hit just about every notable location.

Except Mexico, that is – the ninth-largest beer market in the world.

But Mexican beverage and retail conglomerate Femsa – formerly known as Fomento Economico Mexicano (NYSE: FMX) – now faces the end of its 25-year Mexican duopoly with rival Grupo Modelo (PINK: GPMCY).

Accepting the inevitable, Grupo Modelo will likely negotiate a full selloff to Anheuser-Busch InBev NV (NYSE: BUD) sometime in the near future (BUD already owns 50%). And that puts some very serious pressure on Femsa, which doesn’t stand a chance against an international powerhouse with billions to throw around on advertising every year.

Trying to see the glass as half full, Femsa has begun talks about possibly selling its beer brands. That would include its top-selling Sol and Tecate lines, plus Dos Equis.

Together, those three brands have an estimated worth of $7.5-$9 billion – enough to tempt at least two European brewers: SABMiller (OTC: SBMRY) and Heineken (OTC: HINKY).

Heineken vs. SABMiller – A Taste Test

The SABMiller Equation:

The firm has good reason to look for acquisitions. Despite an impressive market capitalization of $44 billion, it wants to beat Anheuser-Busch InBev, which currently holds the number one spot.
With a much stronger balance sheet and an estimated $150 million in synergies on the table, SABMiller has a lot more to offer.

The Heineken Equation:

With a market cap of $22 billion, Heineken has plenty of motivation, but not nearly as much purchasing power.
While Heineken does distribute Femsa’s beer brands in the United States already, it lacks a strong presence in Latin America and other developing markets outside of Africa.
Heineken has problems with slow sales of its premium brand in Europe and the United States, not to mention the debt it incurred from its joint $12.4 million acquisition of Scottish & Newcastle last year.
Gaining control of Femsa, which accounts for nearly half of Mexico’s beer sales, would offer Heineken a strong position in Mexico as well as a foothold in Brazil. It would also help to offset its over-reliance on the mature European beer markets.
A deal possibly represents Heineken’s last chance to attain a competitive global advantage, which could make it desperate enough to out-bid SABMiller.

But both companies have a few other factors to consider…

Forget Rum & Coke: Beer & Coke Is The Next Big Thing

Purchasing just Femsa’s beer operations would be foolish, since it relies so heavily on distribution through its 6,800-plus FEMSA Comercio convenience stores.

Take those stores away and beer sales would go flat, leaving a bad taste in any future owner’s mouth.

And FEMSA has a bottling business as well – Coca-Cola FEMSA (NYSE: KOF), which it may want to sell with the rest of the business as a three-for-one deal.

If it did, Heineken would have to bow out, as it would be unable to finance such a purchase. But SABMiller would benefit from such a sweetened deal. In addition, Coca-Cola FEMSA already has beer-distributing network in Mexico, Brazil and Columbia, where SABMiller just happened to acquire Bavaria four years ago.

We’d drink to that union right now, except it could get even better, given that Coca-Cola (NYSE: KO) owns 31% of Coca-Cola Femsa.

Since the Mexican company is one of its largest global bottlers, Coca-Cola might want to develop a relationship with SABMiller should it buy out SABMiller altogether.

So far, Coke has only focused on soft drinks, but that could quickly change if the flirtation between Anheuser-Busch InBev and PepsiCo (NYSE: PEP) gets more serious.

After all, Pepsi’s largest independent bottler outside the United States is Anheuser-Busch InBev’s unit – Companhia de Bebidas das Americas (a.k.a. AMBEV) (NYSE: ABV).

In the long run, the Last Chance Saloon could get very crowded. If it does, get set for the investor’s version of happy hour.

Good investing,

Tony Daltorio

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