Mexico’s Arca Continental, one of the largest Coca-Cola bottlers in the world, is moving into Peru, acquiring a majority of the voting shares in the country’s largest soft-drink bottling company.
Arca Continental and Peru’s Corporacion Lindley, Peru’s largest Coca-Cola bottler, announced on September 10 a “strategic alliance” with the Mexican company acquiring 53.2 per cent in Lindley for $760 million, the largest acquisition in Peru this year. Lindley, for its part, will purchase $400 million in shares that Arca will emit to cover the cost of the transaction.
The two companies have combined sales of $5.4 billion, with the Peruvian company representing about 18 per cent of the total. Lindley has a corner on Peru’s soft-drink market, representing 73 per cent primarily with its flagship brands, Coca-Cola and Inca Kola.
The new Arca-Lindley deal is actually an extension of an initial agreement from 1999, when Coca-Cola bought into the Peruvian company. Coca-Cola owns and manages the brands, while Lindley became the company’s bottler, turning out water and juices, in addition to soft drinks.
While the agreement needs to be approved by shareholders and regulators, the market has reacted positively. Fitch Ratings revised up from stable to positive its outlook for Lindley, while Standard & Poor’s could see a rating upgrade by at least one notch once the transaction was completed. It put Lindley’s BB+ long-term credit rating on its CreditWatch positive list. Peru’s Credicorp Capital recommended purchasing Lindley’s 2021 bonds.
“It is time to continue growing and taking on new challenges,” Johnny Lindley, head of Lindley, said in a statement. “Together we will maximise our businesses in terms of quality and quantity.”
The merger gives Arca a lock on soft-drink bottling in the countries that form the Pacific Alliance and should provide opportunities for growth. The two firms plan on building synergies, taking advantage of a bilateral free-trade agreement between Mexico and Peru, as well as opportunities offered through the Pacific Alliance.
Mexico’s presence in Peru is dominated by Southern Copper Corporation, owned by Grupo Mexico, as well as Carlos Slim’s telecoms company Claro, Banco Azteca (Grupo Salinas) and Bimbo in the consumer goods segment. SCC is the largest company trading on Peru’s small Lima stock exchange.
Peruvian authorities are hopeful that the Pacific Alliance will extend the interest of Mexican companies. The investment promotion agency, ProInversion, undertook a roadshow in Mexico in April, visiting Guadalajara, Monterrey and Mexico City. The big push was aimed at Mexican construction companies, with Peru presenting public-private partnerships for infrastructure development for more than $12bn.
Mexica rivals Chile for investment in Peru, with $14 billion in the Peruvian market. Peru is the second destination for Mexican investment in Latin America after Brazil. Peru had a $420 million trade deficit with Mexico through the first five months of this year.
Jose Antonio Fernandez Carbajal goes by the name “El Diablo”, an informal usually reserved for exceptional Latin American athletes.
In 20 years, the man at the helm of Femsa’s executive board, and formerly its chief executive, has steered its growth from a $1.2 billion Mexican drinks company to a $30 billion Latin American juggernaut. Today, Femsa’s operations include the largest publicly listed Coca-Cola bottler; the region’s fastest-growing retail chain, Oxxo; and a 20 per cent stake in Heineken, one of the world’s biggest brewers.
So it is hardly surprising that the Pacific Alliance trade bloc — formed of Mexico, Chile, Colombia and Peru — has stoked the Femsa chief’s regional ambitions. “It creates very good opportunities for us,” says Fernandez. “We can expand our networks all over these countries in Latin America much more easily, without a lot of the typical import problems or paperwork.”
Since its 2012 launch, the Pacific Alliance trade agreement has removed restrictions on the movement of goods and services, waived visa requirements for workers within the trade zone, and created a joint-bourse known as Mila, enabling companies like Femsa to list on the stock market of each country simultaneously.
“The Pacific Alliance is the result of deals already happening rather than making them happen”, says Jaime Trujillo, the head of Baker & McKenzie’s Latin America M&A practice. “But it has also made things a lot easier.”
In recent years, Femsa has expanded its Coca-Cola plants, logistics operations and Oxxo branches across much of Latin America’s Pacific coast. It has also sought to tap into the region’s fast-growing pharmaceuticals market.
In August, Femsa announced a $1 billion bid for a 60 per cent stake in Santiago-based Grupo Socofar, the owner of nearly 800 drug and beauty stores in Chile under the Cruz Verde and Maicao brands, as well as 150 pharmacies in Colombia.
“We have strong capabilities in managing small stores in cities, so we think that pharmacies offer an interesting way to diversify and create synergies with our Oxxo stores,” says Fernandez. “We discovered that this is not yet completely developed in Mexico, but there are opportunities in Latin America like the one we just found.”
Investors have welcomed Femsa’s pharmacy push as an opportunity to boost its flagging Oxxo business in Colombia (where it has only 40 stores since launching in 2009, compared with more than 13,200 in Mexico) and to consolidate its other pharmacy businesses.
Femsa operates about 800 drugstores in Mexico following its purchase of Farmacias FM Moderna in the north-western state of Sinaloa in 2013, and its 2012 acquisition of 75 per cent stake in Farmacias YZA, based in the south-east.
“I think they realised that Oxxo’s format doesn’t travel well, and they can leverage their logistics expertise using the drugstore format,” says Andrea Teixeira, a Latin America retail analyst at JPMorgan in New York. “If Femsa hooks up more of these chains they can get more scale to negotiate with suppliers, and they can expand more.”
According to Fernandez, Femsa will continue to seek out new drugstores in Mexico and grow its Oxxo units, taking advantage of recent energy reforms that allow it to buy petrol stations previously leased from Pemex, the state oil company. It could also seek to merge its drugstore assets in Mexico and Chile. It is on the look out for pharmacy opportunities in Peru, following its opening of a logistics facility there last year.
“We will continue moving all over Latin America through logistics, pharmacies and hopefully we will continue growing Oxxo stores in other countries,” he says. The Pacific Alliance “provides more flexibility to go to these places”. Amy Stillman
Peru’s small, but profitable, insurance sector is the most recent recipient of investment from a Chilean firm.
Chile’s Consorcio Financiero announced on August 25 that it would acquire a 30 per cent stake in Peru’s La Positiva Vida Seguros y Reaseguros, which has a 10.5 per cent market share, making it the fourth largest among 18 insurance companies operating in Peru. The transaction, which still has to be approved by regulators in both countries, is valued at approximately $40 million.
“The incorporation (of Consorcio Financiero) will allow us to continue with sustained growth. We believe the synergies created will help generate best practices for the new products and services,” La Positiva says.
The acquisition comes at a good moment in Peru’s insurance sector, which offers huge room for growth. Total assets of Peru’s insurance sector are equivalent to 1.8 per cent of GDP, while they are close to 5 per cent in Chile.
La Positiva administers about $855 million in assets, compared with $12 billion by Consorcio Financiero. Fitch Ratings, in an August report on Peru’s insurance sector, stated the industry offers “ample room for growth in an underpenetrated insurance market”.
Peru’s market is growing at a fast clip. Gross written premiums increased by 16.2 per cent in the first of 2015 compared with the same six months last year, despite the country’s sluggish economic performance. GDP expanded by 2.4 per cent in the first half of the year.
As important as the growth in premiums is a strong net income, which was close to $180 million for the sector between January and June, an increase of 36.2 per cent from the same period in 2014.
Consorcio Financiero follows a long list of Chilean companies that have been moving into the Peruvian market for more than two decades, a process that will probably quicken on both sides as the Pacific Alliance solidifies and steps taken for integration of the financial sector.
Chilean firms dominate Peru’s airline and department store sectors and are key players in energy and telecoms. The last major incursion came a year ago, when Chile’s Entel took over the mobile phone business in Peru from Nextel.
Finance ministers have been talking about changes involving growth of capital markets, portfolio investments and regulations for pensions funds to increase cross-border investments. These changes would provide new options for insurance companies investing assets under management.
Chilean companies have about $15 billion invested in Peru, while Peruvian firms have invested around $8 billion in Chile. Chile maintained a small trade surplus, about $30 million, with Peru in the first five months of this year.
Financial Times
