Fomento Economico Mexicano, S.A.B. de C.V. FMX, alias FEMSA, is all set to expand its presence in the specialized distribution industry in the United States, which it entered in March 2020. The company agreed to acquire two independent specialized distribution businesses in the United States. The two companies to be acquired as part of the deal are — Spartanburg, SC-based Southeastern Paper Group, Inc. and Wichita, Kansas-based Southwest Paper Company, Inc. These companies together generated annual revenues of nearly $380 million as of September 2020.
FEMSA expects to seal the deal before the end of 2020 after the customary closing conditions are satisfied.
FEMSA’s acquisition transaction with these companies is in sync with its strategy of creating a national distribution platform. The company’s venture in the specialized distribution industry relates to its plan of investing in adjacent businesses, which can leverage capabilities across different markets, providing an opportunity for attractive growth and risk-adjusted returns.
With the presence of its OXXO business and other retail operations, the company has become an expert in the organization and management of supply chains and distribution systems. Notably, FEMSA serves large numbers of businesses and retail customers through millions of interactions in different industries.
Further, the latest transaction is likely to complement its investment in WAXIE Sanitary Supply (“WAXIE”) and North American Corporation in March 2020. This marked the company’s entry into the U.S. specialized distribution industry, which covers a wide variety of sectors, including fresh and frozen products, decoration, DIY, office supplies, furniture and stock clearance.
Overall, FEMSA’s exposure in various industries, including beverage, beer and retail, gives it an edge over its competitors. The company mainly gets its exposure to the beverage industry through Coca-Cola FEMSA KOF, which operates as the world’s largest franchise bottler for Coca-Cola’s KO products. In the beer industry, it enjoys a notable position as it owns 14.76% in Heineken HEINY, a leading brewer with operations in 70 countries.
Moreover, its share in the retail space relates to the operation of various small-format store chains, including OXXO, through its FEMSA Comercio subsidiary. Apart from these, FEMSA provides logistics, point-of-sale refrigeration solutions, and plastics solutions to its business units and third-party clients through its FEMSA Strategic Businesses subsidiary.
FEMSA has been benefiting from its growth via acquisition strategy. FEMSA Comercio’s recent agreement with SMU, S.A. to acquire the latter’s OK Market store chain, is likely to help FEMSA bolster its market footprint in Chile. OK Market is a renowned small-format store chain in Chile, with its operations spread in more than 120 locations. Its earlier acquisitions of a minority stake in Jetro Restaurant Depot, AGV, and a 40% stake in Grupo Socofar as well as the joint venture with Raízen reveal its commitment to invest in the expansion of core businesses.
Shares of the Zacks Rank #4 (Sell) company have gained 40.8% in the past three months compared with the industry’s 9.8% growth. The soft stock performance can be attributed to its robust margin picture. During the third quarter of 2020, consolidated gross margin gained from positive sales mix, efficient collaboration with key supplier partners and better margins in Ecuador. Additionally, the company’s digital initiatives and business expansion endeavors have been on track.
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