Photograph by Valerie Rosenburg/Anzenberger via Redux
Photograph by Valerie Rosenburg/Anzenberger via Redux

Coca-Cola Femsa SAB’s offer to buy Spaipa SA, Brazil’s second-largest closely held Coke bottler, for $1.86 billion seems pricey. But Latin America’s largest Coke bottler may squeeze out enough costs to make it a sound deal. With Brazil’s economy still struggling, this may be the right time to buy.

The Mexican bottler’s expansion in Brazil makes sense for several reasons. For starters, Brazil is Latin America’s largest economy with untapped Coke-drinking potential. The average Brazilian gulped down 241 8-ounce servings of Coke last year, based on company estimates, less than the 401 units consumed by Americans, and a mere third of the 745 drunk by Mexicans, who boast the world’s highest consumption per capita. Plus, buying Spaipa gives the bottler a big footprint in the state of Sao Paulo, the richest in Brazil.

True, Coca-Cola sales volumes in Brazil were 3.7 percent lower as of late July from a year earlier and may end this year little changed, as a result of Brazil’s weakened consumer demand, according to Credit Suisse. Brazil’s $2.5 trillion economy grew less than 1 percent in 2012 and -- despite more optimistic forecasts recently -- it may grow only 2.3 percent this year, a fraction of the 7.5 percent GDP growth levels of 2010 that once made Brazil a favored investment destination. But difficult economic times yield good buying opportunities.

In late June, Coca-Cola Femsa snapped up Companhia Fluminense de Refrigerantes, a small Brazilian bottler, for $448 million, or 11.2 Ebitda -- earnings before interest, taxes depreciation and amortization -- a price that, Credit Suisse estimates, is in the midrange of what Coca-Cola Femsa paid in previous acquisitions.

The price tag for Spaipa is a good deal steeper. After all, the Brazilian bottler generated $134 million in Ebitda during the last 12 months, according to JPMorgan & Chase Co., which means Coca-Cola Femsa is paying 13.8 times Ebitda for the company. This is higher than the 12.9 Ebitda multiple that investors attribute to Coca-Cola Femsa’s own shares. What’s more, Spaipa is less profitable. Its 16.3 percent Ebitda margin is lower than Coca-Cola Femsa’s 19.2 percent, according to Bloomberg.

The key here is the $33 million in cost cuts Coca-Cola can extract from the deal. Taxed at 31 percent and capitalized, these synergies amount to $227.37 million in savings. Factor this in, and the multiple paid for Spaipa drops down to a less pricey 12 times Ebitda. This may not be dirt cheap, but not bad considering it gives Coca-Cola Femsa added muscle in Brazil.

With sluggish Brazilian growth for now and 30 percent of the country’s bottlers in independent hands, Mexico’s Coca-Cola Femsa may have more opportunities to grow. Three years ago Brazil was the toast of investors, and its companies expanded globally. With a recovering U.S. economy and a host of reforms in store, it may just be Mexico’s time to have a Coke and a smile.

(Raul Gallegos is the Latin American correspondent for the World View blog and a contributor to the Ticker. Follow him on Twitter.)