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Mexico's Femsa Retains Large Dollar Position Amid M&A Hopes

05/02/2012 | 01:15pm US/Eastern
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--Femsa ready for M&A opportunities with large USD holdings

--Significant USD position led to 1Q FX loss in pesos

--No hedges against euro fluctuations - CFO

--Retail unit to open 1,100 new Oxxo quickie marts

--No impact seen on new store permits from Walmex bribery inquiry

 
   By Amy Guthrie 
   Of  
 

Mexican beverage-and-retail company Fomento Economico Mexicano SAB, known as Femsa (FMX, FEMSA.MX), continues to hold a substantial portion of its cash in U.S. dollars, a move that has hurt the company's first-quarter bottom line.

Chief Financial Officer Javier Astaburuaga told investors during a conference call that the rationale behind the dollar exposure is that the company believes it's most likely to deploy those resources in a dollar-linked transaction, such as an acquisition.

Femsa would not like to find itself in a position where it faces an attractive opportunity coupled with an unfavorable exchange rate, he explained. Femsa's soft drink unit, Coca-Cola Femsa SAB (KOF, KOF.MX), has been on an acquisition binge, having bought several Mexican bottlers in recent months while currently studying a purchase in the Philippines.

According to the company's first-quarter report, around 63% of its cash and exchange derivatives are in Mexican pesos, while close to 27% are in U.S. dollars. Exposure to the Colombian peso, Argentine peso and Brazilian real each account for less than 5% of the company's cash and cash-equivalents. Femsa reported 27.25 billion pesos ($2.13 billion) in cash and cash-equivalent holdings on its balance sheet at the end of March.

The peso's 9% appreciation against the dollar in the first three months of the year resulted in a MXN458 million foreign-exchange loss for Femsa. The peso remained weaker on the year, with an end-March level of MXN12.85 per dollar versus MXN11.97 in March 2011.

Despite the foreign-exchange hit, Femsa's majority net profit rose 6% on the year in the first quarter to MXN2.32 billion, driven by a 25% increase in revenue, which came in at MXN53.75 billion.

Femsa is also vulnerable to fluctuations in the cross between the Mexican peso and the euro, as it reaps 20% of Heineken NV's (HINKY, HEIA.AE) net profit. The Heineken stake accounted for MXN627 million of the company's majority first quarter net profit, or about 27%.

Astaburuaga said the company has thus far chosen not to hedge against short-term euro fluctuations because it treats the Heineken stake as a long-term investment.

Femsa's retail business, which supplied 35% of the company's quarterly revenue, continues to expand, Astaburuaga said, as the company opened 138 new Oxxo convenience stores in the first three months of the year. Femsa aims to open 1,100 new Oxxo stores this year, similar to its 2011 openings, with capital expenditures of $350 million for the unit.

Astaburuaga attributed Oxxo's 8% improvement in same-store sales, which exclude sales at stores opened in the past year, and 6% rise in customer traffic to Oxxo's efforts to better attend customer needs, from housewives to teenagers.

The executive said the company doesn't expect greater scrutiny on permits for new stores given the accusations that leading Mexican retailer Wal-Mart de Mexico SAB (WALMEX.MX, WMMVY) bribed public officials to quickly secure permits.

-By Amy Guthrie, Dow Jones Newswires; (5255) 5980-5177; amy.guthrie@dowjones.com

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