Good morning, good afternoon or evening, thank you for making the time for this short investor call. The purpose of the call today is to give you context and clarity on the transaction we announced yesterday. On Wednesday night, FEMSA announced the outcome of its strategic review. As part of their new strategic direction, FEMSA announced its intention to focus on its retail and beverages business and to divest its holding in the Heineken Group in the next 24 to 36 months. FEMSA has been a valued partner and shareholder of Heineken for 13 years. Before going into the announced transaction, I would like to start with Evergreen. Our ambition is to deliver superior balanced growth to consistently create long-term shareholder value. We do this with a clear strategic focus on five priorities, beginning with driving top-line growth by shaping the future of beer and beyond.
These priorities propel our growth algorithm, accelerating growth, unlocking productivity gains, reinvesting them to grow faster. The cycle begins again. We measure success with our Green Diamond. It embodies the balance we aim to attain. We want growth balanced between volume and value. We want growth and productivity. We want to deliver on our sustainability and responsibility ambitions. We want a productive capital base. This part is our strategy, is our focus of today. Let me therefore reiterate our capital allocation priorities. First, we will invest in organic growth and business expansion. Second, we will abide by our long-term target net debt to EBITDA ratio of below 2.5. We also value a consistent, predictable dividend policy. Fourth, we will continue to pursue attractive inorganic growth opportunities. Last, when the above priorities are fulfilled, we will potentially pursue other opportunities.
One of those other opportunities has just arisen. In our view, a unique opportunity. In our evaluation to participate, we have considered multiple factors. The first one being FEMSA's decision, as it brought a large proportion of Heineken N.V. and Heineken Holding shares to the market within a specific time frame indicated by FEMSA. We believe, secondly, that Evergreen is working and confidence in our strategy is building. Last, we have the financial flexibility to fund this participation, which will be EPS accretive for Heineken shareholders. Let me now take you through the details of the transaction. Yesterday, FEMSA executed an accelerated book building, an ABB transaction, for the sale of 20.9 million shares in Heineken N.V. and 17.3 million shares in Heineken Holding for aggregate gross proceeds of EUR 3.2 billion.
These shares represent an aggregate economic interest in the Heineken Group of 6.6%. This will reduce FEMSA's economic interest from 14.8% to 8.3% after the transaction. FEMSA has also placed exchangeable bonds for a notional amount of EUR 500,000,000 . Taken together with the ABB, FEMSA have therefore sold just over half their position in the Heineken Group. The representatives of FEMSA on the Heineken N.V. Supervisory Board and Heineken Holding N.V. Board of Directors have resigned. We announced that Heineken N.V. purchased 7.8 million shares in Heineken N.V. and 3.9 million shares in Heineken Holding N.V. for an aggregate purchase price of EUR 1 billion.
The price paid was EUR 91 per Heineken N.V. share, which represents a 3.5% discount to yesterday's closing price. EUR 75 per Heineken Holding share, which is a 3.6% discount to yesterday's closing price. On the chart, you will see the ownership structure in the boxes pre- and post-transaction. Heineken chose to purchase a mix of Heineken N.V. and Heineken Holding shares. As you are aware, each Heineken Holding share effectively represents one Heineken N.V. share with the same earnings and dividend per share. We purchased both shares at a discount to their respective market prices, and Heineken Holding shares are even more attractively priced relative to Heineken N.V. shares. Let me also clarify the accounting treatment. The Heineken N.V. shares that we acquired will be kept in treasury, like we have done in the past.
We have entered into a cross-holding agreement with Heineken Holding, which among others, includes a waiver of payment of any dividends on the holding shares held by Heineken N.V., as well as on as many Heineken N.V. shares held by Holding that corresponds to these Holding shares held by Heineken N.V. That was a tongue twister. With this cross-holding arrangement in place, the holding shares that we acquired will be recorded in our balance sheet as a financial asset included in non-current assets. The changes in fair value will be booked in other comprehensive income and not through the P&L. For purposes of per share calculations, the number of outstanding shares is reduced by the total number of shares purchased in Heineken N.V. and Heineken Holding.
Effectively, the accretion is similar to purchasing Heineken N.V. shares into treasury, but at a lower price. We can hold the shares indefinitely. There are no time limitations. It is important to note that nothing changes to the legal title of the Heineken N.V. shares held by Heineken Holding N.V. and its control and stewardship. Heineken Holding N.V. will continue to hold the absolute majority in Heineken N.V. With this transaction, we expect an EPS accretion of circa 2% excluding financing, or circa 1% if we finance the transaction fully with debt at the average interest rate expected for 2023, which we flagged this week to be 3.1%. We remain firmly within our target net debt to EBITDA ratio of below 2.5, as the impact to net debt to EBITDA is approximately 0.15x .
We will hold the shares in treasury and as a financial asset and as I said, can do so indefinitely. However, we do maintain strategic flexibility to use these assets if required. Thank you for listening and we now open up for questions. Let me hand it back to Bailey.
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star followed by one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. The first question today comes from the line of Olivier Nicolai from Goldman Sachs. Please go ahead. Your line is now open.
Good afternoon, Harold, Federico. Got a few questions, please. First of all, could you go through your rationale for only 1 billion shares? Why not more, EUR 1 billion of shares? Why not more? Why not less? What's the rationale behind buying both types of shares, not only the holding, for instance? Perhaps, was the EUR 1 billion the maximum you could consider, considering your balance sheet target of 2.5? That's it for the first batch.
Yeah. Well, thank you. I think one of the, one of the big themes that are coming out from the, from the conversations that we're having is that we are actually trying to find balance in the way that we do business. We talked about the balance of volume and value growth, but also in terms of how we deploy our capital. Therefore, we looked at where do we feel comfortable to stay within our financial policy, to still have a meaningful opportunity that can be crystallized by this transaction, and also taking into account the cash flow generation of our business and the, hopefully the Distell deal that is coming into play, yeah, hopefully over the next couple of days.
We felt that the combination of all of these three was right to put about EUR 1 billion out there. It is also a fair representation, a fair part of what FEMSA has put out, and therefore, in the aggregate balance, we believe that this was an appropriate mix that was delivering EPS accretion, did not touch in a meaningful way our financial capacity. We're confident in our cash flow generation of the business and therefore, you know, that's the criteria that we were looking for. We were also very keen, because we want to be a price follower in this one, that we were not going to be over-representative in the total share that FEMSA has put out, as an indicative number.
The reason why we did both shares is, as I tried to articulate, because we did want to see this as a unique opportunity, given the fact there is such a large block coming to the market in one go. At the same time, yeah, we recognize the discount that Heineken Holding has at the moment, which allows us for a higher EPS accretion at the same time, whilst the economic benefit to the shareholder does not really change. We do recognize that the Heineken Holding investment is somewhat less liquid, and that's why we also really wanted to make sure that we had the right mix in the portfolio. Those three considerations brought us to that balance that we that between the holding shares and the Heineken N.V. shares. I hope that answers your question.
Thank you very much.
Thank you. We kindly ask that each person asks one question and one follow-up question. The next question today comes from the line of Trevor Stirling from Bernstein. Please go ahead. Your line is now open.
Hello, Harold. one question from my side, please, Harold. In the press release you talk about holding, that N.V. would keep the holding shares for the foreseeable future. I wonder if you could just give us a bit more color on, you know, how long is that crystal ball, how long is foreseeable? in what sort of circumstances could you Where you might want to dispose of those, how you might want to dispose of those holding shares.
Good morning, Trevor. Thanks for that question. Look, the foreseeable future, it is indeed the case that I'm wearing glasses, Trevor, so my foreseeable future might be slightly different than somebody else's. What that phrase is meant to indicate that at this moment in time, we are not holding these shares in treasury or on our balance sheet because we have already an allocated purpose to those shares. We do not have that at this moment in time, which is why we're saying we're holding them there for the foreseeable future until events change. What are situations? I mean, we have had situations in the past where inorganic opportunities, like, for example, the China Resources breweries or the FEMSA deal in itself, was actually funded in part with shares that were held in treasury or simply by shares.
We do believe, therefore, that the strategic flexibility is there so that these shares are not there for indefinite, if they can be put to good use, for the further growth and business expansion that we aspire to for our business. That is what I meant to indicate.
Super. Thank you very much, Harold.
Okay. Thanks, Trevor.
Thank you. The next question today comes from the line of Richard Withagen from Kepler. Please go ahead. Your line is now open.
Yeah, good afternoon, Harold, and thanks for the question. I have two, please. First of all, Heineken does not have a history of share buybacks. How do you think about buybacks as subsequent cancellation of these shares that you might buy back as a potential way to return excess cash to shareholders? Then the second question I have is, you know, how does this transaction square with Heineken's focus on capital efficiency? At the capital markets event, you talked about, you know, improving capital turnover. You know, with this transaction, I think the opposite is happening.
Let me, let me take that one, last indeed. Let me start with the first one. It is true that Heineken does not have a history of share buybacks. At the same time, I'm deliberately putting out our capital allocation principles in that priority order. It is very important that for us to first and foremost invest in growth, that we stick to our financial discipline, that dividend takes priority. Then we have had a very successful trajectory of inorganic growth. We have done many, many, in my view, successful acquisitions that we have built the business with over time. Only when the first four are fully funded and fully explored, will we then go into other opportunities.
What you indeed hear me not say is that we don't foresee that it is in anywhere in the future possible that we will not go into further share buybacks. This is not what I'm closing out at this moment in time. What I am saying is that this is not the first priority. There are four before that. That's what I would like to signal at this moment in time. Also to the point of cancellation, we have not gone and canceled the slides. We are holding them in treasury, as I just articulated, because, you know, they may come in good use for any of the others, particularly the inorganic expansion, of course. That is how we think about share buybacks in the longer term.
In terms of, you know, the return on capital deployed, I do believe that this capital allocation is working in that sense because I don't think it will have an impact on our return on assets, ambitions, and the progress that we're wanting to make in that on that particular front. I think it's entirely consistent.
Very clear. Thanks, thanks, Harold.
Okay, Richard. Thank you.
Thank you. The next question today comes from the line of Laurence Whyatt from Barclays. Please go ahead. Your line is now open.
Afternoon, Harold. One from me, please. You mentioned a few times around the success of your recent M&A, and you do state M&A ahead of capital returns in terms of share buybacks as a priority. The fact that you're going down the share buyback route, does that mean that either there's much less to buy in terms of M&A, or people are asking for too much value for the assets that may or may not be for sale? Could you give us a comment on how you see the M&A availability at the moment? Thank you.
No, Laurence, thank you very much for this question because it's actually a good one, and if I had thought about it before, I might have addressed it in my script. It is definitely not the signal that I want to give. I do believe that we're like the Distell deal, that like actually Grupo Zivic , that we just acquired fully. We are constantly looking at organic, but also inorganic opportunities. We do believe that's why the EUR 1 billion comes into play, that this does not materially affect the firepower that we have in order to continue to grow inorganically. It is not an indication of us seeing limited opportunities or that pricing for the opportunities is too high.
It's just a sign of confidence, that we believe that with the financial profile that we have and the cash generation that we have in our business, that we believe we can do both at this moment in time and not let go of this unique opportunity.
That's really clear, Harold. Thanks very much.
Thank you, Laurence.
Thank you. The next question today comes from the line of Ed Mundy from Jefferies. Please go ahead. Your line is now open.
Afternoon, Harold. I've got two questions. Apologies if the first one's already been answered, but on slide seven, you show the EPS accretion of 2% excluding financing and 1% if fully debt-financed. Have you confirmed if it's fully debt-financed or is it... If this is being carried out with the free cash on the balance sheet? The second question on slide three, you give, you know, very clear rationale for the transaction. I guess my question is, you know, based on the board's confidence that the Evergreen strategy continues to govern momentum, does the board think that Heineken shares are a good investment and not undervalued at around 10x EBITDA basic consensus estimates?
Well, thanks, Ed. First to the point of accretion. Look, we deliberately gave you the growth number and the number when we financed this according to the average interest rate that we flagged earlier this year. As we said in the announcement, we will at first use cash and available credit facilities. It indeed depends a little bit on the organic cash generation of our business to look at what is the ultimate mix that we put in to purchase these shares. If we would finance it would likely to be a mix with bonds and commercial paper. You know, it could well be that cash comes into the mix as well.
That's why we didn't want to be too precise about this, because we're still figuring that out. We're actually very comfortable that we can do that with what I just said and still stick to our 3.1%. That's what I would like to say on how to finance it and why we give this corridor of accretion. In terms of the rationale of the transaction, well, we got the full support of our Supervisory Boards to go into this trajectory, which is a clear signal that the board also believes that this is a good investment opportunity.
As we said, looking at the share price today and the responses that we got on our full year results, we do believe that we have a confidence in our strategy going forward, which makes us also confident to do this transaction. Thanks for that, Ed.
Very clear. If I could perhaps just follow up on slide three. you know, this is a sort of unique circumstance, but clearly, FEMSA still have just under half their position. I mean, is the door closed to buying back more shares if a similar liquidity event was perhaps to occur, you know, beyond the lockup of 90 days or so, you know, given you've still got a strong balance sheet after this?
The way that we look at this, Ed, in all transparency, is really on a moment by moment basis. We try to be very disciplined to the slide on capital allocation that we put out there, and therefore, we currently saw in the current set of circumstances, with the current conditions on pricing, mix, and discounts, that this was the right opportunity for us to act because all of the other metrics were being met. I don't know what that looks like in the future. I don't know when more shares will be available. I don't know whether there is more of a need for organic opportunities to fund. As you know, we also have a big CapEx bill to fund, and there are inorganic opportunities maybe arising that Laurence has just indicated.
I think it's absolutely clear that at this moment in time, we do not want to signal that we will be a participant of any future transactions. We will really judge that on a case by case basis according to our own capital allocation principles.
Very clear. Thank you.
Okay. Thanks, Ed.
Thank you. The next question today comes from the line of Chris Pitcher from Redburn. Please go ahead. Your line is now open.
Thank you very much, Harold. Most of the questions have been answered. Just to confirm on that slide four, obviously, the family was a significant participant in the holding company offering. Are you able to give any more color on how that, the holding company structure may change? Or is this, you know, the family's now got a bit more flexibility at the holding company level? Thanks.
Yeah. Look, to be honest, I was, as you can understand from governance purposes, I was not involved in what happened at the holding level or the family level, this is really purely a factor of the transaction that they placed. I have nothing more to comment on that because I didn't even know.
Thank you. Thank you as much. Thank you. Bye.
Thank you. The next question today comes from the line of Sarah Simon from Morgan Stanley. Please go ahead. Your line is now open.
Hi, you've made some interesting comments today around your rationale for holding these shares in the treasury. Can you give us some color on what type of M&A opportunities are out there? I understand that you wouldn't be too specific in your answer, but any color you could give would be helpful. Thanks.
Sarah, now you make me worried because I wasn't actually planning to give any very specific references to acquisition opportunities of any kind. What I was trying to say is that we believe that organic growth is our priority, but inorganic growth, as you've seen from the track record that we have built over the last years, we continue to explore opportunities like we've done with Grupo Zivic or with Beavertown in the U.K., recently. We believe that that continues very firmly to be a part of our growth trajectory going forward under certain sets of criteria and conditions. That's really all I try to flag. Yeah, let's see what happens.
Okay. Maybe I read too much into it. Thank you so much for the clarification.
Yeah. Well, maybe it was just a long week for me, but, yeah, that's really what I was trying to say.
Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. The next question today comes from the line of Robert Vos from ABN AMRO. Please go ahead. Your line is now open.
Yes. Hi, good afternoon. I have one question left. You enter the year with a financial leverage of around 2.1, as we heard earlier this week. This deal adds 15, or 0.15. Can you remind us how much when this deal will be closed, how much will be added from that deal? I think the press release said something like not significant, but, will you stay within the 2.5 or maybe you can specify how much this deal will add to the financial leverage? Thank you.
Yeah. Indeed, indeed, Robert, what I can confirm is that as we said at the time of that announcement, that this will have a minimal impact, and therefore, according to the principles that I've outlined, you can assume that this will be within the 2.5x guidance. If for whatever reason we go above, we will very soon bring it below. This was definitely not a consideration for us. We can, we can fully absorb that within our financial capacity.
Okay. That's very clear. Thank you.
Yeah. Hey, I think if there are no further questions, we should give it back to Bailey to close, I think.
We do have one final question on the line.
Okay. Let's hear it. We have two more minutes.
Wonderful. Final question today comes from the line of Ed Watson from ING. Please go ahead. Your line is now open.
Afternoon, Harold. I'll keep it quick then. Coming back to your earlier observation about not wanting to be a price leader in the transaction, would it be reasonable to assume then that in any future sell downs were you to participate, you wouldn't want to be more than 1/3 of the volume?
No, I think to be honest, we haven't thought, given that any thought, Ed. I would assume that this was a special and unique transaction. That's the rationale I gave for that. I cannot really speculate on the future because it's not a present reality. We will take that when it comes.
Okay. Thank you.
Yeah. Thanks, Ed.
Thank you.
Good. Thank you all for your interest and back to you, Bailey.
Thank you. That concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.