NEW note pdf
Heineken spread to parity?
Lock-up expires
PDF attached
This is an update to a prior note and deals with the HEIO (Holding) / HEIA spread not a directional trade on Heineken. I believe the spread which currently trades at 0.875 is more likely to gravitate towards parity than to long term mean.
Femsa owns Heineken NV and Heineken Holding for an economic equivalent of 20%. Femsa owns both lines.
As of today, Femsa is at liberty to sell the stake in full or in part.
Several reasons exist to believe the stake will be sold off. Firstly, the stake is not strategic, but simply a result of accepting the best price on offer for the disposal of the Femsa beer business in 2010. The Heineken stake brings no evident synergies other than perhaps some procurement advantages for Oxxo selling Heineken beer. The Heineken stake may provide Femsa’s board with high-level visibility into the beer market but Femsa is no longer involved with that market and has expressed no desire to return to it.
In fact, the Heineken stake is an impediment to advancing Femsa’s commercial business. Femsa’s Oxxo has been trying to get a licence to sell alcohol in Texas (only 2 hrs away driving distance from their base in Monterrey) but the US State will not give them a licence ruling its corporate parent’s indirect and partial ownership of Heineken NV brewers violates cross-ownership rules.
Further, the recent Femsa Q12015 results show how volatile Heineken income is to Femsa’s numbers. Heineken’s income for the quarter came at MXN1.4bn or 80pct higher than a year ago. Such income was c25pct of Femsa’s total net income before tax whereas last year the Heineken income was 13pct of total before tax. This reflects poorly on Femsa’s earnings quality.
Femsa said in the Q1 call that “ in the short term we will keep our stake in Heineken” and Femsa also said in the call that the lock –up expiry means “we can increase our level of activity (corporate activity)” meaning that they can actively pursue a way to exit the stake.
What Femsa needs is to find the right asset, the right target to justify trading the Heineken income for the new opportunity.
We expect, analysts will continue to ask the question and write-up corporate scenarios for such divestment.
Below, we argue one such scenario is that Femsa can keep HEIO and sell HEIA.
This brings sufficient financial resources for Femsa to continue to expand and also allows influential Femsa shareholders to continue to receive Euro income and keep a board seat in the non-operational Heineken Holding.
The expectation of such divestment may tilt the balance of probability in favour of the spread moving towards parity.