Femsa to Sell Heineken Stake, Other Noncore Assets, Preannounced in Line Q4; Shares Fairly Valued

We applaud the clarity and decisiveness with which narrow-moat Femsa FMX unveiled its plan to focus on long-term strategic priorities in retail and beverage bottling and divest all noncore assets over the next 24 to 36 months, including its 15% stake in narrow-moat Heineken (valued at $8.5 billion) and the Envoy distribution business. Within a day of the announcement, Femsa representatives had resigned from the Heineken board, and the firm had initiated on an equity and exchangeable bond sale that will reduce its stake in the brewer to 8%. Following all divestitures, the simplified operating structure will include only wide-moat Coke Femsa and Femsa retail making up 32% and 68% of operating profits, respectively.

In addition, we have updated our model after preannounced fourth-quarter results (earnings due Feb. 24) that included 23% sales growth topping our 18% projection and consolidated net income of MXN 9.3 billion that was 1% shy of our MXN 9.4 billion estimate. Our growth estimates for sales (11%) and EBITDA (12%) over the next five years are close to Femsa’s updated low-teens growth targets. Thus, our $91 fair value estimate remains in place, leaving shares as fairly valued.

We are maintaining our Standard capital allocation rating. We support Femsa’s plans to fund retail expansion (including 800 to 1,000 new Oxxo stores per year) and invest in digital capabilities encompassing loyalty programs, digital wallets, and B2B technology. Both initiatives should support Femsa’s competitive position in retail and growth outlook over the longer term. Beyond Latin America, we are relieved to hear Femsa remains cautious in its U.S. expansion via acquisitions and that the Valora turnaround in Europe will require little extra cash infusion. In addition, Femsa plans to bring net debt to EBITDA (excluding Coke Femsa) down to below 2 times from roughly 2.6 times by paying down debt (realistic in our view), while using excess cash to pay special dividends or buy back shares.