Coca-Cola Femsa and Arca move duel to Chile

Mexico’s Coca-Cola Femsa and Arca Continental spent the last decade competing to buy up Coke bottlers across Latin America. Now they’re setting their sights on Chile.

That’s the natural last step after Arca bought 47.5 percent of Corp. Lindley of Peru for $760 million, leaving Santiago-based Embotelladora Andina and Coca-Cola Embonor as the primary targets still in play, according to Credit Suisse Group and Corporativo GBM.

After cutting deals from Mexico to Argentina, CocaCola Femsa and Arca have made it increasingly difficult for family-run bottlers to go it alone, especially with Coca-Cola, the world’s biggest beverage maker, encouraging mergers to boost efficiency. Over the past decade, CocaCola Femsa and Arca have snapped up about $10 billion in assets in Latin America — a region that consumes more soft drinks than any other in the world.

Coca-Cola “is seeking to consolidate different regions, and that would imply that in the case of Andina and Embonor, they’d be acquired by other companies that are bigger,” said Tomas Sanhueza, an analyst at Credicorp Capital in Santiago. “I see a pressure on the part of Coca-Cola.”

Andina declined to comment about its potential merger and acquisition strategy. Arca and Embonor didn’t respond to requests for comment.

“Coca-Cola Femsa is always looking for opportunities to grow through reaching its operations’ full potential,” the company said in an emailed response.

Andina and Embonor shares have climbed 18 percent and 7.9 percent, since the Peru transaction, compared with a 1.6 percent increase in Chile’s IPSA index, partly because of the premium Lindley commanded. Brazil- ian investment bank BTG Pactual SA wrote in a Sept. 11 research note that the Lindley deal came at a “high price tag” — some of which will be borne by shareholders in the form of dilutive capital increase — but it also gave Arca “one of the most sought targets in the region.”

The transaction implied an enterprise value of about 13.6 times this year’s projected earnings before interest, taxes, depreciation and amortization — or Ebitda — after adjusting for a lucrative non-compete agreement, according to a calculation by Credit Suisse analysts including Antonio Gonzalez. By comparison, Andina and Embonor trade at 8.9 times and 8.1 times 2015 Ebitda.

Andina, valued at 2.1 trillion pesos ($3.1 billion) on the Chilean stock market, also has operations in Argentina, Paraguay and Brazil. Its Brazilian operations generate 40 percent of revenue — even more than Chile. Embonor, with a 553 billion- peso market capitalization, operates in Chile and neighboring Bolivia.

For Arca, Embonor would be an attractive target, because of its exposure to highgrowth markets like Bolivia, according to Credicorp Capital’s Sanhueza.

As part of the Arca-Lindley deal, the Lindley family committed to put part of the proceeds back into its partner, buying 64.5 million Arca shares for $400 million. Smaller bottlers are likely to come around to that type of arrangement as being in their own best interest, GBM analyst Miguel Mayorga said.

“Being realistic, the growth opportunities are very limited for small and mediumsized bottlers in the system,” Mayorga said. “They need to look at opportunities to build a more profitable vehicle, that becomes part of a more profitable system, where not only will they make more money for themselves, but so too will the bigger bottler and the Coca-Cola Co.”