Coke bottler may find Brazil market still has fizz

2 Jul

coca_rueda_4Coca-Cola Femsa may find that Latin America’s largest consumer market still has plenty of fizz. The Coke bottler’s $448 million purchase of Companhia Fluminense de Refrigerantes, at 11.2 times operating earnings, was a sound deal. Middle class Brazilians may no longer stomach corrupt politics, but they continue to gulp more Coke. The transaction may usher more deals among Brazilian bottlers.

For KOF, the world’s largest Coke bottler, acquiring Fluminense, a small Brazilian bottler, implied no wallet-busting effort. The all-cash deal was the smallest in dollar terms of its last six acquisitions. Indeed, the purchase marks KOF’s return to more conservative investing. For starters the deal’s 11.2 times earnings multiple sits in the mid range of what KOF has typically paid for bottlers over the past three years, according to Credit Suisse estimates. Plus, it is a sound price to pay for Fluminense’s 17 percent operating returns. This is an improvement from the eye-watering $1.35 billion, or 13.5 times operating earnings multiple, KOF paid in 2012 for 51 percent of a Philippines bottler that generated just 9 percent returns. What’s more, expanding in Brazil, a familiar turf for KOF, offers considerable cost-saving advantages – nearly $14 million a year by the bottler’s own estimates.

Still, Fluminense needs work. The bottler’s operating margin falls short of KOF’s 19.3 percent estimated returns for 2013, based on data compiled by Bloomberg. Credit Suisse reckons product penetration in Fluminense’s territory reaches merely 35 percent, a far cry from KOF’s 60 percent level in its established Brazil operations. Already Coke consumption per capita in Brazil lags behind Mexico, home to the most soda-thirsty consumers in the world. But sales growth is still there. KOF’s soft drink sales in Latin America’s largest economy have risen an average of 2 percent a year since 2010, despite weak economic growth. KOF’s record of strong management could do much to improve Fluminense’s outlook.

But perhaps the more most interesting aspect of the KOF deal is its timing. Brazil has lost its former shine as the go-to destination for investors. The country’s Bovespa equity index is down nearly 26 percent this year, making it the worst performer in emerging markets. And protests by a middle class fed up with ineffective government continues to scare off investors. That KOF chose to expand at a time of turbulence suggests there may be good deals to be had in the bottling sector. With Fluminense, KOF will control 30 percent of the market for Coke in country. But with 11 independent bottlers serving 36 percent of Brazil’s Coke volumes, KOF has plenty of opportunities to continue growing.

Brazilians may be angry, but they may still have the time and money to have a coke and a smile.

Review: US business with Mexico needs fewer walls

10 Jun

img-side-bookBusiness between the United States and Mexico needs fewer walls. But Shannon O’Neil argues U.S. policy sees Mexico as a problem not a partner.  Her book “Two Nations Indivisible: Mexico, the United States and the Road Ahead”, debunks the idea that the southern neighbor is a drain on U.S. wealth. Trade with Mexico has made the United States richer. It’s time Washington embraces that reality.

Mexico has become an integral part of the U.S. economy.  The trade bill between the two countries reached almost $500 billion last year making Mexico a top trade partner to the United States, and the second largest consumer of U.S. goods after Canada. A number of Fortune 500 companies, from Johnson & Johnson and General Electric to Hewlett-Packard have production chains that cross the Rio Grande. And nearly 12 million Mexicans and almost three times as many Mexican descendants now live in the United States. But critics of closer economic ties between the countries blame the North American Free Trade Agreement for taking U.S. jobs abroad, and they claim that Mexican immigrants bring down wages.

O’Neil, the resident Latin America expert at the Council on Foreign Relations, is at her best dispelling such myths. Mexicans stepping over the border compete for low wage work, mostly done by previous migrants like them. Plus, the number of college-educated Americans has only risen over the past three decades, which means fewer U.S. citizens compete for the type of low-wage jobs immigrants take on anyway. Economists of all stripes agree that many factors, notably technological change, have hurt U.S. high school dropouts more than Mexicans eager to work for less. What’s more, members of the Hispanic community, far from being a drag on growth, are ten years younger than the average U.S. resident, and spend $1 trillion a year.

U.S. companies that outsource jobs south of the border are also regularly attacked. But O’Neil illuminates the debate pointing out that doing some outsourcing can help companies generate more U.S. jobs later on. Her use of machine-maker Caterpillar Inc. as an example is dead on. In 2005 Caterpillar laid off 560 workers when it moved its small engines castings production from Mapleton, Illinois to Saltillo, a town in Northeast Mexico. Cheaper castings helped the company create 1,500 new jobs back in Illinois, nearly three times the U.S. jobs initially lost. True, not all outsourcing stories are that clean, but the idea that stronger economic ties with Mexico only hurt the U.S. is misguided.

Sadly, such thinking prevails when Washington passes laws that promote waste and hurt growth. For instance, a U.S. obsession with border security led the government to double border patrol agents to 20,000 and raise the U.S. Border Patrol budget to $3 billion by 2010. Yet only 340,252 illegal aliens were apprehended in 2011, the lowest level in 40 years. Four out of five illegal immigrants still make it across. Meanwhile, trucks carrying nearly $1 billion worth of goods back and forth across the border everyday face substandard roads in U.S. border states, long delays at the border, and a mass of bureaucratic restrictions that make trade more expensive. Even by U.S. Commerce Department estimates – O’Neil points out – a minute delay at the border can cost the U.S. economy $100 million and nearly 500 foregone jobs. The U.S. needs better infrastructure and less people with guns at the border.

To be sure, O’Neil gives Mexico credit for building a stronger democracy in the past 20 years, but she doesn’t give the country a free pass. Its $1.2 trillion economy has brought millions of people into the middle class, but poverty remains a problem. Government corruption still weakens key institutions. Its energy industry is in shambles. And Carlos Slim’s monopoly power in the telecom sector has burdened Mexicans with very costly phone service. President Enrique Peña Nieto’s reform agenda must address these issues.

But Mexicans are under no illusions about the difficult road ahead. In that sense the book serves better as a mirror held up at the United States. American policymakers must realize that business has become more globalized just as the country’s demographic makeup has changed. The country needs a policy that puts illegal immigrants on the path to green cards and citizenship. This remains controversial only because the first thing America needs is a change in mentality. O’Neil’s book does the important job of highlighting the problem. Decision makers in the United States would do well to read it and absorb its message.

* “Two Nations Indivisible: Mexico, the United States, and the Road Ahead”, by Shannon K. O’Neil is published by Oxford University Press.

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