Coca-Cola FEMSA (NYSE:KOF), the second-largest Coca-Cola (NYSE:KO) bottler in the world and owned by both Coca-Cola and FEMSA (NYSE: FMX), continues to show a willingness to invest for future growth and margin leverage. KOF has spent roughly $6 billion over the last two years, including nearly $700 million to expanding into the Philippines. Now KOF has added some significant assets in Brazil with the $1.9 billion acquisition of Spaipa, the second-largest private Coca-Cola bottler in Brazil.
The Deal
Over the Labor Day weekend, Coca-Cola FEMSA announced a deal for Spaipa, the second-largest private bottler in Brazil. KOF will be paying $1.9 billion in cash for Spaipa and its operations in Parana and Sao Paulo. At that price, KOF is paying about 2.4 times sales and 16.2 times trailing EBITDA. While that's a pretty steep premium to the recent trends in comparable deals (with EBITDA multiples in the 10 to 11 area), KOF believes that quick synergies and goodwill will reduce the effective price to about 10 times to 12 times EBITDA within two years.
A Worthwhile Deal
With the deal for Spaipa, KOF is augmenting its volume by about 8% and its EBITDA by 6%. This deal will increase the company's volume in Brazil by 40% and create a contiguous operating geography that should ultimately generate some meaningful logistics and distribution synergies. The deal will also mean that Coca-Cola FEMSA will control almost 40% of the Coca-Cola system in Brazil, and it will increase the contribution of Brazil to KOF's total volumes from 16% to 22%.
Is KOF Pushing Too Far Too Fast?
Seven deals totaling $6 billion is a lot of activity for a company with $31 billion in market capitalization and close to $12 billion in revenue. Many of these smaller transactions have had relatively less integration risk, including four deals in Mexico (Tampico, CIMSA, Queretano, Yoli) that expanded the company's already considerable presence in the country. Likewise, Spaipa is a relatively well-run bottler with modern facilities and a very familiar business model.
Even so, that's a lot of activity in a region that has seen consumer spending come under pressure and economic conditions take a turn for the worse. On the other hand, the opportunities to expand and consolidate operations in already profitable areas doesn't come on demand – with the Spaipa deal, 70% of the Brazilian Coca-Cola bottling market will be controlled by three companies (including Embotelladora Andina (NYSE: AKO-B)) and it's not unreasonable to think that Coca-Cola FEMSA found itself in a situation where it could either buy Spaipa today or see it go to another large buyer that wouldn't likely be looking to sell again anytime soon.
With that, I wouldn't assume that Coca-Cola FEMSA is finished bringing bottlers into the fold. The company doesn't have unlimited debt capacity, and all of the $1.9 billion of the Spaipa deal will come from debt, but bottling operations generate solid and predictable cash flows and that can generally support a higher level of debt before the company faces significantly higher interest rates on new debt. What's more, Coca-Cola and PepsiCo (NYSE:PEP) want to see more of their global bottling operations in strong hands, and that should lead to Coca-Cola helping Coca-Cola FEMSA where it can with acquisitions in areas like Southeast Asia.
The Bottom Line
Coca-Cola FEMSA is certainly not a cheap stock at today's price. Being the premier Coca-Cola bottler in areas with strong per-capita consumption (Mexico in particular) offers better than average down-side protection, while rising incomes do suggest that consumption growth could continue beyond the rate of more developed countries. Still, at over 12 times trailing EBITDA, Coca-Cola FEMSA is almost as as expensive as Coca-Cola and today's price appears to assume long-term free cash flow growth of nearly 20% - a demanding expectation for almost any company.
Disclosure – As of this writing, the author owns shares of FEMSA.