Latin America: Will Arca and Continental Merger trigger plant closures?

According to news agencies, Embotelladoras Arca and Grupo Continental announced May 20 that their merger, announced in January, was approved at the Shareholders’ Meetings of both companies.

The merger will be carried out as previously announced through the exchange of newly issued Arca shares for Contal shares, at an exchange ratio of 0.625 Arca shares per Contal share. The new entity will be named Arca Continental S.A.B. de C.V. The new company will continue to be majority family owned by now four Mexican families, with TCCC holding a 7,7% minority share, and 16% trade on the stock exchange. 

This is one of the largest transactions in the Latin American Coca-Cola bottling system in recent years. Arca Continental will cover a sales territory of over 53 million consumers via nearly 700 thousand points of sale.

Management issued the usual upbeat comments, emphasising that Arca Continental will be the second-largest Coca-Cola bottler in Latin America and fourth-largest in the world, mainly due to its share in the huge Mexican market, where Arca so far served the Northern region and Continental covered another 14.5% of Mexican territory, including the States of Coahuila, Durango, Zacatecas, Aguascalientes, San Luis Potosí, Jalisco, and Colima. Continental also owns some sugar mills. Other operations brought into the wedding by Arca, are in Ecuador and Northern Argentina. 

What will it mean for workers? No suprise these days and with a weak market for soft drinks in Mexico, the merger is expected to bring savings on the backs of the workforce. Already when the merger was announced in January, the firms said they hope to achieve "synergies" of around 8% of sales with the merger of the two companies, suggesting the possibility of
facility closures. Analysts synergies to bearound $80m a year. Credit Suisse said in a statement "Mexico could be run with half the bottling capacity currently in place (...) Arca has 12 bottling facilities while Contal has ten - average capacity utilisation of the combined entity is below 60%."  

Some analysts pointed out, that the move can be seen as part of a wider process of consolidation in the global soft drinks industry but can also be linked to a slowdown in the pace of growth within the Mexican market, which is prompting operators to focus on their international units - a process for which greater scale is a key attribute.

The new company will have about half of the size of its biggest peer, Coca-Cola FEMSA, in terms of unit cases (Arca Continental will bottle approximately 1,2 bln Unit Cases while FEMSA announced 2,4 bln in 2010), and less than half in terms of sales (3,3 blnUSD versus FEMSAs 8,2). 

Analysts have been said to expect that FEMSA, sitting on a huge amount of cash which will exceed borrowings by the end of the year, will consider further acquisitions, coming under pressure from Arca which has increased profitability and stock price faster than FEMSA, and has made a number of major acquisitions in the last years. 

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