London, Oct 16 - Brewing giant SABMiller is in talks with FEMSA's family shareholders about an equity stake in an enlarged group, a source said, a move that would give it a strong lead in the race for Mexico's FEMSA Cerveza.
The London-based SABMiller is already ahead of rival Heineken to acquire FEMSA's $7.5 billion plus beer unit as it has the flexibility and firepower to offer the controlling families a continuing interest in the brewer.
"The FEMSA families are talking to SABMiller and seem keen to maintain an interest. So a move to include them is just the kind of deal that SABMiller has done in the past and can do in the future," said the source, who has knowledge of the situation.
SABMiller declined to comment on its interest in FEMSA.
SABMiller and Heineken, the world's No.2 and No.3 biggest brewers, are both interested in the Mexican brewer, but the Dutch brewer has high debts and limited ability to issue shares with the Heineken family still firmly in control.
"For SABMiller, FEMSA ticks all the boxes for deals it likes to do -- it's emerging markets, it's great growth potential and it can construct a cash and shares deal. That puts SABMiller very much as the favourite," said one industry analyst.
The London brewer earns 90 percent of its profits from emerging markets such as Colombia, South Africa and China, and has a history of expanding into growing beer markets.
The so-called FEMSA families own nearly 39 percent of the FEMSA group, which has brewing, soft drinks and retailing interests, and could get a stake in SABMiller as part of the sale of Mexico's second biggest brewing group.
FAMILY CONTROL
The families currently control the group as they have about 75 percent of the voting shares of FEMSA, which earlier this month said it was "in discussions with several parties to explore opportunities involving its beer business".
"The families want to be involved and take a stake, and SABMiller could construct a cash and shares deal like it did with Miller and Bavaria before," said the source who has knowledge of the situation.
SABMiller has a history of doing big share-based takeovers in its expansion from a largely Southern African-based group before South Africa's democratic election in 1994 to a global player.
In 2002, the then SAB bought Miller for $5.6 billion giving Miller owner Altria a 29 percent stake in the enlarged SABMiller, and in 2005 it bought Colombia-based Bavaria for $7.8 billion giving the San Domingo family owners a 15 percent stake.
A deal would bring together SABMiller's collection of brands such Miller Lite, Peroni and Grolsch with the Mexican brewer's Sol, Tecate and Dos Equis, and plug a gap between SABMiller's U.S. operations and those in South and Central America.
Analysts have noted that SABMiller would also benefit from FEMSA Cerveza's imported brands in the United States, rising Mexican beer consumption and entry into Brazil, the world's second biggest national profit pool after the United States.
Mexico is the world's sixth-largest beer market, in which Cerveza has a 42 percent share against 56 percent for Modelo, in which the world's No.1 brewer Anheuser Busch InBev has a controlling stake but not voting control.
Broker UBS has valued FEMSA at $7.5 billion, equating to a historic EBITDA multiple of 9.7 times compared to major Latin American brewing deals over the last eight years at 10.6, and the 10.1 times which SABMiller paid to acquire Bavaria in 2005.
The broker argues the multiple seems low but it relates to FEMSA's Kaiser Brazilian operation, which is loss-making and is No.4 brewer in Brazil with 8 percent of the market competing with AB InBev's 68 percent market share.