FEMSA (FMX) To Enter Specialized Distribution Industry In US

Fomento Economico Mexicano, S.A.B. de C.V. (NYSE:FMX) , alias FEMSA, signed pacts with shareholders of WAXIE Sanitary Supply (“WAXIE”) and North American Corporation (“North American”), to enter a new platform within the Jan-San (the janitorial, sanitary supply), Packaging and Specialized distribution industry in the United States. The new platform will benefit from the expertise of two market leaders — WAXIE and North American — with FEMSA having a majority stake in the combined company. FEMSA plans to invest nearly $900 million in the venture.

Following the completion of the aforesaid deal, the current shareholders of WAXIE and North American will be the investors in the combined company. The companies will retain their management teams, with the current CEOs serving as the co-CEOs of the new enterprise.

The investment is in sync with FEMSA’s strategic plan of investing in adjacent businesses, which can leverage capabilities across different markets, and 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.

The company expects the aforementioned transaction to close in the first semester of 2020, after receiving the required regulatory approvals.

WAXIE and North American are leading consumable distributors in the janitorial, sanitary supply and packaging industry, with complementary market footprints. These companies currently operate 26 distribution centers across the country and serve more than 27,000 customers in industries like building service contractors, education, government, retail and hospitality.

The companies together generate annual revenues of more than $900 million. WAXIE has headquarters in San Diego, CA, and North American is headquartered in Chicago, IL.

Notably, FEMSA has been benefiting from its growth via acquisition strategy. The recent 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. Additionally, FEMSA Comercio’s drugstore business, operating under the brands YZA, Farmacon, Moderna, Cruz Verde, Fybeca and SanaSana, is viewed to have significant growth potential.

However, shares of the Zacks Rank #4 (Sell) company have declined 21.5% in the past three months against the industry’s 0.6% growth. The soft stock performance can be attributed to the company’s soft operating results across some divisions in the past few quarters. Operating margins at FEMSA Comercio’s Health and Proximity Divisions in third-quarter 2019 were hurt by operating expense deleverage in these units. Tariff-related and higher input costs are headwinds hurting its bottling unit.

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