3 Ways To Play Your Thirst For Heineken

By Will Ashworth | January 25, 2012 AAA
Back on Jan. 20, 2010, I wrote an article about Heineken's (OTCBB:HINKY) $7.8 billion purchase of Femsa's (NYSE:FMX) beer operations. I finished the article by suggesting the deal would be good for both companies. Furthermore, I thought the deal would also help Boston Beer Company (NYSE:SAM) because it would concentrate Heineken's focus on Latin America and the intense rivalry Femsa's beer brands have with Grupo Modelo, 50% owned by Anheuser-Busch InBev (NYSE:BUD). Since the announcement of the deal on Jan. 11, 2011, Heineken's stock is nearly flat while Femsa is up approximately 64%, Anheuser-Busch InBev up roughly 24% and Boston Beer increased a whopping 112%. Everyone but Heineken has gone on a decent run. Its turn will come soon enough. For those who want to place a bet on the world's second biggest brewer, here are three ways to make it count. (For related reading, see Beeronomics: Factors Affecting Your Pint.)

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Direct

The most obvious choice is to buy its stock over the counter on the pink sheets. Its average daily trading volume (ADTV) is around 33,637 shares, which isn't a lot when you consider that Boston Beer's ADTV is nearly three times Heineken's, despite being about one-thirty-eighth its size by enterprise value. Although liquidity is definitely an issue, long-term investors need not worry because everything else about it seems fine. Its group beer volume for the first nine months of 2011 grew by 3.5% on an organic basis with the biggest percentage gain in Central & Eastern Europe at 6.5%. In the emerging markets, its Asia-Pacific segment saw a 6.1% increase year over year. Its Heineken brand saw its organic volume grow 4.4% in the first three quarters of the year, and continues to see double-digit growth in both Asia-Pacific and Africa and the Middle East. In 2011, it introduced Desperados, its tequila-flavored beer, in 10 more countries with France leading the way in its established regions. In addition, volume growth of its Strongbow cider continues outside its home market in the U.K. Heineken's profit for all of 2011 is expected to be in line with its net profit of $1.9 billion in 2010. Given its marketing costs were higher, its profit number is more than adequate.

Its business is clearly changing. In 2005, just 48% of its group beer volume came from emerging markets. Five years later and it's up to 66%. In terms of earnings before interest and tax (EBIT), emerging markets have gone from generating 37% of its EBIT profits in 2005 to 57% by the end of 2010. It's not hard to see where its growth will be. Take India for instance. Through its 37.5% interest in United Breweries Limited, it holds 56% market share of the beer market led by UBLs Kingfisher brand, which has three times the volume of its nearest competitor. In addition, it only introduced Heineken in August 2011. India's population is very young and should take to its products in a big way. Through its Femsa acquisition, it holds 40.6% market share in Mexico; where the beer market is growing and is also very profitable. In Brazil, it has just 9.4% market share, but it expects to grow this through its Kaiser and Bavaria brands. Globally, however, the Heineken brandis still the revenue driver. (For more information, take A Look At Corporate Profit Margins.)

Indirectly

The first way is to own Femsa's stock. When Femsa sold its beer operations to Heineken in 2010, it gained a large economic interest in the beer company. L'Arche Green N.V., the Heineken family's holding company owns 50.82% of Heineken Holding N.V., public shareholders another 34.24% and Femsa has a 14.94% interest. Heineken Holding NV in turn owns 50.005% of Heineken NV, also a public company, with the public holding 39.852% of that company and Femsa the final 10.143%. This labyrinth-like ownership structure allows the Heinekens to retain control of the business founded by Gerard Adriann Heineken in 1863, after acquiring the Haystack brewery in Amsterdam. Converting Femsa's interest in both companies into U.S. dollars, its interest in Heineken as of Jan. 20, 2012, is worth around $4.95 billion. With share prices the same as when the deal was struck in 2010, Femsa's equity is worth about $297 million less due to a four cent appreciation of the U.S. dollar versus the euro. Long-term, nothing has changed from 2010. This is a good investment for Femsa shareholders and patience will be rewarded.

Directly/Indirectly

The third way to own Heineken involves a little of both. Folio Investing, creators of Ready-to-Go folios that allow you to own partial shares of public companies, has a Wine, Beer and Spirits (WB&S) Folio that owns 17 liquor-related companies including HINKY.PK and FMX. All 17 holdings have an equal 5.88% weighting with the exception of Willamette Valley Vineyard (Nasdaq:WVVI), which rounds out the Folio at 5.92%. According to information published on the Folio Investing website, over the past five years, the Folio's averaged an annual return of approximately 10.2% compared to around a 0.6% increase for the S&P 500. Therefore, if your total investment portfolio had a market value of $100,000, you might decide to put $10,000 into the WB&S Folio, giving you a decent amount of exposure to Heineken's business. Even if Heineken doesn't perform (that's unlikely) over the next few years, I'm sure the rest will. It's a good compromise. The only caveat here is costs. Folio Investing charges $290 annually for an unlimited number of portfolios. If you only invest $10,000, the annual cost would be 2.9% of your investment, which doesn't make a great deal of sense. However, if you have $65,000 to invest, it brings the cost down to just over 0.44%, annually. If you have assets to invest and there isn't an exchange-traded fund that meets your needs as is the case here, it's an excellent alternative. (Also read, Advantages And Disadvantages Of ETFs.)

The Bottom Line

Heineken's size has it dipping into all kinds of different investments. In December, it acquired the Galaxy Pubs from the Royal Bank of Scotland for approximately $625 million. Galaxy has 918 pubs and has been managed since 1999 by a Heineken subsidiary. Heineken will merge these pubs with its own existing group of 462 outlets, further strengthening its on-trade channel. The best part is the deal is a money-maker from the word go. If you're a big picture thinker, Heineken should make loads of sense as an investment.

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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

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