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Coca Cola Femsa Down to Strong Sell

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On Oct 1, 2013, Zacks Investment Research downgraded Mexican bottler Coca-Cola FEMSA S.A.B. de C.V. (KOF - Free Report) to a Zacks Rank #5 (Strong Sell).

Coca-Cola FEMSA is co-owned by the Coca Cola Company (KO - Free Report) and Fomento Economico Mexicano S.A. (FMX - Free Report) , also known as FEMSA. It produces and distributes Coca-Cola, Fanta, Sprite, Del Valle and other trademark beverages of The Coca-Cola Company.

Why the Downgrade?

There was a sharp downward revision of estimates after Coca-Cola FEMSA announced take overoftheprivately-owned bottler, Spaipa S.A. Industria Brasileira de Bebidas (Spaipa).

On Sep 2, KOF entered into a definitive agreement to take over Spaipa, the second largest privately-owned bottler in the Brazilian Coca-Cola system for $1.9 billion, in order to augment its Brazilian business volume by 40%. The all-cash deal, subject to the Brazilian antitrust authority’s approval, will be financed with a new bank debt.

Analysts, in general, are concerned that the takeover will largely increase Coca Cola Femsa’s debts and affect its liquidity. KOF’s cash on hand in the recently concluded second quarter of fiscal 2013 was lesser than the previous quarter. The new bank debt is also expected to increase the interest expense of the company, which was already higher in the second quarter compared to the first.

Coca Cola Femsa is on an acquisition spree and is taking over Brazilian bottlers to bolster its presence in the Brazilian market and diversify itself from the low-performing Mexican beverage sector. In August, it acquired its Brazilian peer – Companhia Fluminense de Refrigerantes – for $448 million in an all-cash transaction. We, however, are skeptical about the strategy as the Brazilian market is currently facing macroeconomic headwinds in the form of food inflation, lower government spending and higher taxes.

Another soft beverage company worth considering are Coca Cola Enterprise Inc. (CCE - Free Report) ,which carry a Zacks Rank #2 (Buy).

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