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By Bloomberg

Mexican conglomerate Fomento Economico Mexicano SAB is a step closer to freeing up billions in fresh cash, just when it may need the money.

The $34 billion company, known as Femsa, can now sell shares from its 20 percent holding in brewer Heineken NV after a lockup on the stake expired at the end of April. Femsa acquired it five years ago in a swap for its Mexican beer business. The position has appreciated in that time to about $9 billion as Heineken’s stock more than doubled. The stake, combined with Femsa’s existing cash, gives it more than $11 billion in ammunition for M&A.

“Femsa doesn’t like to own things that they really can’t control,” Lauren Torres, a New York-based analyst at UBS AG, said of the Heineken shares. “If they could parlay it into something that could give them another round of great returns, because they know that there’s another opportunity out there, then they’re going to do it.”

Acquisitions could shore up growth prospects that have moderated as the company’s Oxxo convenience-store business finds fewer Mexican street corners where it has yet to plant its flag. One option is to pursue a bigger slice of the fragmented Latin American pharmacy business, taking advantage of Femsa’s experience in small-format retail. Or it could add to its Coca- Cola bottling operations.

Weighing Alternatives

Chief Financial Officer Daniel Alberto Rodriguez Cofre said on an April 30 conference call that the expiration of the lockup was “not lost on us.” He added the company doesn’t envision a change in the Heineken holding in the “short term.”

Femsa “still has a very strong balance sheet” and doesn’t foresee needing to sell the stake.

“Having said that, obviously, we always have the responsibility to look for alternatives and benchmark those alternatives with Heineken shares,” he said.

A representative for Femsa declined to comment when reached on May 11.

Over the past decade, Femsa’s market value has grown about ninefold as management expanded the company’s Oxxo empire to about 13,000 locations. This year, UBS projects Oxxo’s store count will grow 9 percent, the slowest pace in at least 15 years.

Should Femsa seek to sell its Heineken stake in pursuit of targets to help boost growth, it could probably find a buyer. With global beermakers considering consolidation, Heineken itself could be interested, to keep would-be buyers at bay, as could possible suitors of the Amsterdam-based brewer. Heineken last year rebuffed an approach by bigger brewer SABMiller Plc.

Selling the stake would imply paying capital gains taxes on the profits, and Femsa probably won’t do so before it finds another way to deploy the proceeds, said Miguel Mayorga, an analyst at Corporativo GBM SAB.

Drugstore Expansion

The company could pursue a Brazilian drugstore chain such as Raia Drogasil SA, valued at $4 billion, or closely-held Drogarias Pacheco, according to a Jan. 30 UBS research note by analysts including Torres and Alan Alanis. It may also add to its roughly 800 pharmacies in Mexico or explore more deals for Coke bottling assets, UBS said. Its Coca-Cola Femsa SAB unit has used M&A to become the world’s biggest independent bottler of Coca-Cola Co. products.

Representatives for Raia Drogasil and Drogarias Pacheco didn’t respond to requests for comment.

Top Player

Femsa is already among the top four players in the Mexican pharmacy market, along with Farmacias Benavides, Farmacias del Ahorro and Farmacias Guadalajara, and it may seek further consolidation, according to UBS. The top four players account for just 40 percent of the market, it said.

“Long-term growth at Femsa is going to be driven by inorganic expansion in a significant way,” Corporativo GBM’s Mayorga said in a telephone interview from Mexico City. “If at some point one of the big players in Mexico were willing to sell, I’m sure Femsa would make a serious effort” to make a deal.

Another possibility is to extend its conquest of the Coca- Cola bottling system, according to Mayorga. Targets in the sector could range from closely-held bottlers to Arca Continental SAB, the second-biggest bottler in Mexico, with a market value of 158 billion pesos ($10.4 billion), he said.

Credit Suisse Group AG analysts led by Antonio Gonzalez wrote in an April 30 note that Chilean bottler Embotelladora Andina SA -- valued at 1.75 trillion Chilean pesos ($2.94 billion) -- is a “key M&A target.”

New Directions

If the conglomerate enters a completely new line of business, it wouldn’t be the first time. The company started primarily as a beermaker, then transformed into a retailer and Coke bottler. It also dabbled in banking along the way. Today, its other interests include gas stations. It has even proven willing to explore new parts of the world, with its Coca-Cola Femsa unit agreeing to buy a 51 percent stake in Coca-Cola Bottlers Philippines Inc. in 2012.

Femsa has trial stores for its Oxxo format in Colombia, and it’s currently seeking permission to sell alcohol in Texas, according to a May 4 regulatory filing. If it gets it, Femsa said it could invest $850 million to open 900 convenience stores within 10 years.

“Whether it be the U.S., whether it be Colombia, whether it be other parts of Latin America, if the economics work then they’ll do it,” UBS’s Torres said.