Acquisitions Appear Priced In; Downgrading on Valuation vs. Global Peers (212) (212)

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1 Latin American Equity Research New York, June 9, 2008 COCA-COLA FEMSA Company Update Mexico Beverages UNDERPERFORM Acquisitions Appear Priced In; Downgrading on Valuation vs. Global Peers Alexander Robarts Sergio Matsumoto New York: Santander Investment Securities Inc. New York: Santander Investment Securities Inc. (212) (212) (06/03/08) CURRENT PRICE: US$62.40/M$64.37 TARGET PRICE: US$65.00/M$72.80 What s Changed Rating: From Hold to Underperform Price Target (US$): Setting YE 09 at US$65.00 EBITDA Estimates (US$): 08 from 1,384 to 1,459 Mn 09 from 1,487 to 1,530 Mn 10 introducing 1,623 Mn Company Statistics Bloomberg KOF 52-Week Range (US$) E P/E Rel to the IPC (x) E P/E Rel to Soft Drinks (x) 1.7 IPC (US$) 3,054 3-Yr EPADR CAGR (06-09E) 11.5% Market Capitalization (US$ Mn) 11,521 Float (%) Mth Avg Daily Vol 11.4 Shares Outst Mn (ADR: 10:1) 1,846 Net Debt/Equity (x) 0.2 Book Value per ADR (US$) 26.7 Estimates and Valuation Ratios Net Earn (M$ Mn) 6,908 8,034 8,792 9,921 Current EPS Net Earn (US$ Mn) Current EPADR P/E (x) P/Sales (x) P/CE (x) FV/EBITDA (x) FV/Sales (x) FCF Yield (%) Div per Share (US$) Div Yield (%) Sources: Bloomberg, Company reports, and Santander estimates. Investment Thesis: We are downgrading Coca-Cola Femsa (KOF) to Underperform from Hold based on valuation (relative to the global and Latin bottling peer averages), as potential value accretion from recent acquisitions are fully priced in, in our view. KOF currently trades at a 28% premium to its 2007 forward average FV/EBITDA. Recently, its FV/EBITDA and P/E multiples surpassed its global peer averages after 2007 discounts of 22% and 27%, respectively. We believe the acquisitions of Remil and Jugos del Valle, for a combined firm value of approximately US$540 million, should generate incremental 2008 and 2009 EBITDA of 1.5% and 3.9%, respectively. While soft drink volume growth in KOF s home market is faster than the home markets of its global bottling peers, many factors more than offset this, in our view, suggesting KOF should revert to trade at a relative discount. Compared to its global peers KOF has: (1) significantly lower EVA; (2) higher political risk (Argentina, Brazil and Venezuela); (3) a higher proportion of PET bottles as percentage of total package mix (where we see further upside cost risk); (4) substantially less exposure to faster growing non-carb beverages; (5) a sharper increase in Coca-Cola concentrate costs (in Mexico); and (6) more competition from B-brands, including Big Cola, which continues to help make annual real price increases in Mexico elusive. We also expect the price for KOF s future non-organic growth to continue to increase, and, with very limited acquisition opportunities in Latam, territories in India, Philippines or South Africa may be targets that could imply new share issuance. Remil was acquired at a 48% premium to KOF s 2003 Panamco deal and a 54% premium to KOF s own trailing FV/EBITDA multiple. Finally, we note that starting 1Q08, KOF significantly reduced its financial disclosure making country-specific trends indiscernible. Reasons for Change to Estimates: Our 2008 and 2009 peso EBITDA forecasts remain relatively unchanged. A stronger peso/us$ exchange rate explains the higher U.S. dollar EBITDA estimates. Valuation and Risks to Investment Thesis: We are setting our yearend 2009 target price of US$65.00 based on a sum-of-the-parts DCF analysis. Upside risks include faster private consumer spending growth in Mexico; lower-than-expected raw material costs in Mexico; and less competition from B-brands. * Employed by a non-us affiliate of Santander Investment Securities Inc. and is not registered/qualified as a research analyst under NASD rules.

2 Recent Latin American Acquisitions Appear Priced in; Downgrading on Valuation Coca-Cola Femsa is the second largest bottler for The Coca-Cola Company worldwide, accounting for 42% and 36% of Coca-Cola Company sales in Mexico and Latin America, respectively. It mainly produces, distributes and markets proprietary Coke brands, including non-carbonated beverages, It operates in nine Latin American countries, with its core Mexican assets accounting for 57% of consolidated EBITDA, as well as Brazil and Colombia, which account for 15% and 11% of consolidated EBITDA, respectively. The company is controlled by Mexico-based brewer Femsa, which owns 54% of KOF shares, while The Coca-Cola Company has a 32% stake. WHAT HAS CHANGED? VALUATION An important change at KOF is that its valuation discount with its global peer average has completely closed and its multiples recently surpassed the average reflecting the combination of a sharp (and fragile, in our view) multiple expansion this year at KOF and a contraction of the global peer average multiple. This is evident both on a forward FV/EBITDA and P/E basis, as shown in Figures 1 and 2. In terms of FV/EBITDA, KOF s current relative premium is 3%, compared to its average 22% relative discount in KOF s current P/E premium to its global bottling peer average is 5%, versus an average discount of 27% in In our global peer average we include the world s largest Coca-Cola bottler, Coca-Cola Enterprises (CCE), PepsiCo s biggest bottler, Pepsi-Bottling Group (PBG), and Hellenic, which is Coca- Cola s third largest bottler (KOF is the second largest). Helping to lower the current peer global average multiple was the recent profit warning from CCE regarding its pending 2Q08 results. This resulted mainly from weaker-thanexpected volume in Europe and in U.S. convenience stores (mostly with single serve packages) as higher gas prices, among other factors, reduced foot traffic in this key sales channel. Moreover, PBG s forward multiples have slightly contracted since year-end 2007, and for the first time, KOF has traded above it on both an FV/EBITDA and P/E basis starting this year. Figure 1. Global Coke Bottlers Forward FV/EBITDA Comparison, Jan-07 to Present 11.0x 10.0x Hellenic 9.0x KOF 8.0x Peer Average PBG 7.0x CCE 6.0x Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Mar-08 May-08 Sources: Bloomberg, Company reports and Santander estimates. 2

3 Figure 2. Global Coke Bottlers Forward P/E Comparison, Jan-07 to Present 20.0x 18.0x Hellenic 16.0x 14.0x KOF Peer Average CCE PBG 12.0x 10.0x Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Mar-08 May-08 Sources: Bloomberg, Company reports and Santander estimates. Premium to global peers is unjustified, in our view. A closer look at the KOF s valuation and operating metric versus its global peers helps explain why KOF s current premium to the peer average is unjustified. First, in terms of EBITDA growth this year and in 2009, KOF is expected to trail the peer average. In 2008, Hellenic s growth boosts the global peer average considerably. But in 2009, KOF s growth is slower than all three peers. While KOF s return on invested capital is line with its peers, its EVA is approximately 50% lower due to higher a WACC. Figure 3. Global Coke Bottlers Valuation Comparison (As of June 3, 2008) Bottler Coca-Cola Femsa Global Peer Average Coca-Cola Enterprises Coca-Cola Hellenic Bottling Pepsi Bottling Group Ticker KOF US CCE US EEEK GA PBG US Multiples vs. Growth Market Capitalization 11,521 NM 9,498 15,761 6,967 FV/EBITDA 08E FV/EBITDA 09E P/E 08E P/E 09E EBITDA 07/08E growth 10.3% 12.4% 1.6% 29.6% 6.1% EBITDA 08E/09E growth 4.9% 7.4% 5.5% 10.9% 5.7% Operating Performance 2007 EBITDA margin 20.8% 13.9% 12.6% 16.4% 12.8% 2008E EBITDA margin 20.3% 13.8% 11.9% 16.8% 12.8% ROIC 08E 12.6% 12.0% 9.9% 14.7% 11.5% WACC 10.6% 7.8% 7.4% 8.2% 7.8% EVA 1.9% 4.2% 2.5% 6.5% 3.7% Sources: Bloomberg, Company reports and Santander estimates. In addition, KOF is exposed to higher political risk, particularly in Argentina, where beverage price controls are in place, Brazil, where soft drink excise taxes may increase in the short term, and Venezuela, where plants have been temporarily closed by union actions. KOF also has a higher proportion of PET bottles as percentage of total package mix. Given an U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

4 Recent Latin American Acquisitions Appear Priced in; Downgrading on Valuation estimated 6- to 9-month lag between higher oil prices before they impact PET prices, we expect 2Q08 gross margins to begin to feel the impact of the 81% increase in oil prices over the past nine months. KOF also has substantially less exposure to faster growing non-carb beverages, and while the Jugos del Valle will accelerate a catch-up, the lower production economies of scale with non-carbs (relative to soft drinks) should pressure consolidated margins over the medium term. Also, unlike its peers, KOF is experiencing (through 2009) a sharper increase in Coca-Cola concentrate costs in its core market, Mexico. Finally, we believe KOF has more exposure and competition from soft drink B-brands, including Big Cola, which is Latin America s largest B- brand producer operating in 9 countries (including Mexico, Venezuela, Colombia and Central America. In Mexico, this competition should continue to cause annual real selling price declines. Relative to its Latin American bottling peers (Figure 4), KOF is posting similar earnings growth, but has lower operating margins and significantly lower returns on invested capital. Figure 4. Latam Coke Bottlers Valuation Comparison (As of June 3, 2008) Bottler Coca-Cola Femsa Latam Peer Average Andina Arca Contal Ticker KOF US AKO/B ARCA* CONTAL* Santander Rating Underperform Hold Hold Hold Multiples vs. Growth Market Capitalization 11,521 2,233 3,088 1,972 FV/EBITDA 08E P/E 08E EBITDA 07/08E growth 10.3% 11.2% 13.3% 11.5% 8.8% EBITDA 08E/09E growth 4.9% 4.3% 3.4% 3.9% 5.6% Operating Performance EBITDA 07 margin 20.8% 23.4% 25.8% 24.1% 20.3% EBITDA 08E margin 20.3% 24.1% 27.4% 24.1% 20.7% ROIC 08E 12.6% 19.2% 21.6% 18.1% 17.9% WACC 10.6% 11.0% 11.7% 10.3% 11.0% EVA 1.9% 8.1% 9.8% 7.7% 6.9% Sources: Bloomberg, Company reports and Santander estimates. Figure 5. Coca-Cola FEMSA Historical Forward FV/EBITDA Multiples, 3Q05-Present 9.0x 8.0x 8.5x 7.8x 7.0x 6.0x 6.2x 6.3x 7.1x 6.7x 6.1x 6.1x 6.1x 7.0x 6.5x 7.2x 5.0x 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 Current Source: Company Reports and Santander estimates. 4

5 KOF s current valuation implies an unjustified 28% premium to its 2007 level, in our view. We are downgrading the shares to Underperform from Hold. Compared to its own historical forward FV/EBITDA multiple (Figure 5), KOF now trades at a 28% premium to its 2007 forward average (26% over its 3-year average), which we believe is unjustified and implies an unattainable acceleration in earnings growth. As we describe below, the impact of the Remil and Jugos acquisitions (a total of US$530 million) are not expected to materially boost earnings this year, and may add 3.9% to EBITDA in Also, value accretion to shareholders, given what KOF has paid, may begin at year-end In addition, we expect the price of non-organic growth (i.e. potential future Coke bottling acquisitions) to continue to increase over the coming years. Finally, we note that operationally, we expect PET costs (about 22% of consolidated cost of sales) to pressure KOF s consolidated gross margins relatively more than in In Mexico, higher high fructose corn syrup prices should offset lower sugar prices (total sweetener costs are approximately 20% of Mexico s cost of sales. In Brazil and in Central America, soft drink volume growth will likely decelerate this year, partly owing to difficult year on year comparisons (which we can no longer closely monitor owing to the recent reduction in KOF s financial transparency). We are introducing our year-end 2009 target price of US$65.00 and are downgrading the shares to Underperform from Hold. The target price implies a total return of 5% compared to our estimated 14% return for the Mexican local market benchmark. KOF s shares currently trade at an FV/EBITDA multiple of 8.7 times, or a 10% premium to the implied target multiple of 7.8 times. Our target price is based on a sum-of-the parts DCF analysis and replaces our year-end 2008 target price of US$50 per ADR. Figure 6. Coca-Cola FEMSA Valuation by Division (U.S. Dollars in Millions) FCFF 10 Year CAGR Firm Value As % of Total Firm Value 2009E Total Debt Equity Mexico 5.8% 6,580 52% 1,383 5,197 Latincentro 7.4% 3,208 25% 3,208 Mercosur 11.8% 2,907 23% 2,907 Total 12, % 1,383 11,313 Total Cash 973 Total Equity 12,286 Minority Interest 288 Majority Equity 11,998 Target ADR Price Figure 7. WACC Calculations and Terminal Growth by Division (U.S. Dollars) Mexico Latincentro Mercosur Country Risk-Free Rate 3.9% 3.9% 3.9% Country Risk 1.5% 3.1% 2.5% Beta Equity Risk Premium 5.5% 5.5% 5.5% Cost of Equity 11.2% 11.8% 11.2% Equity/Total Capital 75% 100% 100% Tax Rate 38% 31% 34% After Tax Cost of Debt 4.7% 6.2% 6.0% WACC 9.6% 11.8% 11.2% Perpetuity Growth Rate 1.6% 2.0% 2.2% U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

6 Recent Latin American Acquisitions Appear Priced in; Downgrading on Valuation JUGOS DEL VALLE A SECOND ATTEMPT AT NON-CARBS Jugos s EBITDA expected to be positive in 2H09. KOF s exclusivities at Oxxo will start to expire this year. Another change at KOF is that management has recently provided incremental operating information regarding the consolidation of Jugos del Valle, which began in 1Q08. First, Jugos del Valle in Mexico is now expected to generate positive EBITDA only after May Part of the reason is that the assets had been operating at depressed EBITDA margin levels (approximately 5% to 6%). Also significant selling and marketing expenses are required to build brand equity in the various non-carb categories, mainly juices. The aggressive marketing underscores how much The Coca-Cola Company, through its bottlers in Mexico, has fallen behind in the non-carb category compared to its competition. As such, the assets are expected to only break-even at the EBITDA level through 2Q09, and expect 0.8% incremental 2008 volume sales on a consolidated basis (1.5% of Mexico s volume). Only the Jugos volumes sold to the traditional channel (mom and pops) will be reported in KOF s quarterly volume sales. The Jugos deal marks the second formal initiative by the Coke bottlers in Mexico to penetrate these fast-growing categories. The prior initiative, Salesko, partly failed because the bottlers bore the majority of the marketing expense burden. The Jugos ownership structure is more favorable to the bottler in that 50% of the costs will borne by The Coca-Cola Company since they have a 50% stake in the project. However, 50% of the profits, when they begin in 2H09, will also go to Coke. By early June, all but one Coke bottler had purchased a stake in Jugos. This means KOF currently owns approximately 20% of the joint venture in Mexico. The Jugos del Valle assets in Brazil (16% of total Jugos s Latam sales) should be consolidated into KOF by 4Q08. KOF should have a 30% stake in that project assuming The Coca-Cola Company keeps a 50% stake and the other Coke botters in Brazil buy into the project. KOF in Brazil is expected to be operating with the same non-carb operating structure (excluding water) as in Mexico. Jugos del Valle and tea-based Matte Leao products will begin to be sold at the time of consolidation and combined with Sucos Mais, Powerade and Nestea products, which are already being sold. Starting this year, KOF must also comply with the antitrust conditions associated with the Jugos acquisition. The main condition is that KOF s exclusive sales agreements with the convenience store, Oxxo, in KOF s Mexican franchise territories, must be allowed to expire without renewal. This is to allow other competing beverage products, including B-brands and PepsiCo products, which are not sold in these points of sales, to be available. Oxxo is KOF s second largest client in Mexico after the Walmex associated stores (including Walmart and Sam s Clubs), and we estimate Oxxo accounts for approximately 3% of KOF s total Mexican volume. The antitrust authorities are also requiring KOF to purchase and install new coolers in mom-and-pop stores where only one Coca-Cola cooler is available and/or other beverage products are not, which according to management total approximately 15,000 outlets. If all these points of sale required new coolers, we estimate the all-in-cost to be approximately US$12 million, or about 2.2% of our estimated 2008 operating income in Mexico. Recall that mom-andpop stores in Mexico are the most profitable points of sale for KOF, and account for approximately 70% of total volume. We see this condition as another source of increased competition and less price flexibility. We also understand that compliance with this condition should be reached by the end of Finally, we note that by paying a transaction multiple of 21.2 times trailing FV/EBITDA, KOF s Jugos deal also underscore how expensive non-organic growth is for Latin American bottlers. Recall that the deal was first announced in December 2006 and we estimate that it will take at least three years to achieve a trailing single-digit multiple. 6

7 REMIL THE LAST MEANINGFUL COKE ACQUISITION IN LATAM? Value accretive in 2010; a revenue rather than a synergy-driven transaction. Others changes at KOF relate to Remil, including the fact that the transaction has taken longer than expected to close and that related capex increases our consolidated 2008 and 2009 capex estimates by 8% and 10%, respectively. According to management, the delay in closing the deal is associated with final due diligence with The Coca-Cola Company. As such, instead of starting in the peak summer months of 1Q08, the first full quarter of consolidated will now likely be winter months of 3Q08. Also, owing to expected investments in distribution and information technology related to Remil, we now expect consolidated capex to reach US$400 million this year and US$425 million in We estimate the Remil acquisition may start to become value accretive to KOF shareholders at year-end 2009, assuming the final price does not change and KOF can boost Remil s EBITDA margin by 350 basis points (which would be below KOF Brazil s 2007 EBITDA margin level). According to the KOF s results conference calls, Remil s EBITDA margin is approximately 5 percentage points below KOF Brazil s EBITDA margin level. Scarcity of targets in Latin America. Since Remil s franchise territory is not contiguous to KOF s territories in Brazil, Remil s bottling plant will not be closed. In many prior Latin American Coke bottling acquisitions, typically the best sources of operational synergies has been to serve the newly acquired territory from existing plants. In this case, KOF s Remil s transaction is a revenue -driven acquisition. KOF is expected to apply its operational expertise to Remil gleaned from its five years in Brazil since it acquired Panamco, which had assets in the states of Sao Paulo and Mato Grosso do Sul. Selling expenses in the Remil territories should also begin to reflect stepped-up efforts behind Femsa s beer brands, Kaiser and Sol. Figure 8. Mexican Coke Bottlers Firm Value/Unit Case Transaction Multiples, Date Territory/Country Acquirer Stake Unit Cases FV/Unit Case Sep 1994 Buenos Aires, Arg KOF 51% Oct 1994 Santos, Brazil Panamco 100% Nov 1995 Costa Rica Panamco 100% Feb 1996 Buenos Aires, Arg KOF 24% Feb 1996 San Isidro, Arg KOF 100% May 1997 Venezuela Panamco 100% Aug 1997 Nicaragua Panamco 100% Sep 1997 Buenos Aires, Arg KOF 25% Nov 1997 Tapachula, Mexico KOF 100% Sep 1998 Mato Grosso do Sul, Brazil Panamco 100% Oct 2000 Paraguay Coca-Cola 58% May 2003 Panamco (Regional) KOF 100% Average Transaction Multiple ( ) 3.47 July 2007 Minas Gerais, Brazil (Remil) KOF 100% Remil s Premium to the Panamco transaction 48% Remil s Premium to Average of Last 12 transactions 29% The estimated 2007 FV/EBITDA and FV/unit case transaction multiples for Remil are 12.6 times and US$4.47, respectively, which compares to KOF s 2007 FV/EBITDA multiple of 6.7 times (trailing 2007 FV/EBITDA 8.2 times) and the 2003 Panamco acquisition at US$3.03 per unit case. This provides further evidence of how the price of non-organic growth for Coke bottlers in Latin America has sharply increased. Part of the explanation for increasingly expensive acquired growth is scarcity of franchise territories in Latin America. Indeed, the Remil deal was facilitated by the fact that The Coca- Cola Company was the owner of the territory, rather than a family, whose only source of wealth creation is their Coke bottling franchise. In Latin America, the vast majority of the franchise U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

8 Recent Latin American Acquisitions Appear Priced in; Downgrading on Valuation territories are family-owned. This helps explains why over the last eight years, there have only been two noteworthy Coke bottler acquisitions in the region. The acquisition price of Remil could have been even higher, in our view, had Chile-based Andina (which operates the Rio de Janeiro Coke franchise) been asked to participate in a bidding process for the asset. Recall that Andina, whose Brazilian territory is contiguous to Remil, had completed an asset swap with the Coca-Cola-controlled Remil several years earlier. However, according to Andina, they were not invited to the negotiating table. Further material acquisitions in Latin America unlikely. Going forward, we expect the price for KOF s future non-organic growth to continue to increase, and with very limited opportunities in Latam, territories in India, Philippines or South Africa may be targets that could imply new share issuance. Increasing scarcity of potential acquisition targets explains part of this expected price spiral. Given KOF s sheer size, there are very few Coke franchise territories left in Latin America that could have a material impact on KOF s consolidated EBITDA. Even with Remil, we estimate it may add approximately 3.2% to KOF s operating earnings in Unsuccessful discussions with smaller Brazilian and Mexican privately owned Coke bottlers have been ongoing for years, and we do not see why that trend would change. Also, the three other publicly listed (and family-owned) Coke bottlers in Latin America are in strong operational health (unlike Panamco in 2003), and we believe they would not be interested in taking part in joint venture discussions with KOF. In this context of scarcity of targets in Latin America, together with a mid-single-digit organic earnings growth rate expected over the coming years at KOF, we would not be surprised if it has to set its acquisition sights on more far-flung places to grow nonorganically. In these cases, capturing synergies are likely to be even more difficult and or take longer to achieve, which in turn could set the stage for still higher asset prices. In our view, the most likely future acquisitions may be where The Coca-Cola Company has recently acquired bottlers, the Philippines, or where PepsiCo has been increasing its strategic focus, India. There could also be a rationale for SABMiller to be interested in selling its soft drink assets in South Africa as part of a larger transaction. In most of these cases, while KOF s debt capacity has increased since the 2003 Panamco acquisition, we would not be surprised if KOF contemplated a new share offering as part of the deal. REDUCED FINANCIAL DISCLOSURE Another recent change at KOF is that staring in 1Q08, management significantly reduced reported quarterly financial transparency. Specifically, the assets in Brazil and Argentina will no longer be operationally broken down separately, but rather lumped into one operating division called Mercosur. Also KOF s assets in Colombia, Venezuela and Central America are now being reported together as one division called Latinocentro. We attribute the decision to reduce transparency to increased competition with AmBev, mainly in Brazil and Argentina. We believe another reason could be KOF s reluctance to provide countryspecific information to labor unions which could strengthen their position in any future negotiations. Overall, the ability to monitor, measure and forecast operating trends in key countries like Brazil and Colombia, as well as gauge the impact and progress of the Remil acquisition in Brazil, will be significantly reduced henceforth, in our view. 8

9 REVISED EARNINGS ESTIMATES Our 2008 and 2009 peso EBITDA forecasts remain relatively unchanged. However, because our 2008 average peso/dollar exchange rate forecast expects 3.6% stronger peso, our 2008 and 2009 EBITDA estimates in dollars are 5.4% and 2.9% higher. The stronger exchange rate is partly offset by a reduction in the incremental 2008 EBITDA from Remil. As a result of the delay is closing the Remil deal as discussed above, we are reducing the incremental EBITDA from Remil to be consolidated beginning in June 2008 (winter in Brazil) from the full fiscal year Figure 9. Coca-Cola FEMSA Estimates Revisions, 2008E-2010E (U.S. Dollars in Millions*) 2008E 2009E 2010E Previous Current Change Previous Current Change Previous Current Change Revenue 6,575 7, % 6,940 7, % NA 7,814 NA Op. Profit 1,073 1, % 1,151 1, % NA 1,298 NA Op. Margin 16.3% 16.4% 7 bps 16.6% 16.4% -22 bps NA 16.6% NA EBITDA 1,384 1, % 1,487 1, % NA 1,623 NA Net Income % % NA 878 NA EPADR % % NA 4.76 NA *Except per ADR data. NA Not available. Figure 10. Mexico Select Economic Projections, E Real GDP (%) 3.3% 3.0% 3.6% 3.6% CPI Inflation (%) 3.8% 4.4% 3.8% 3.8% US$ Exchange Rate (Year-End) US$ Exchange Rate (Average) Interest Rate (Year-End) 7.4% 7.5% 7.3% 7.3% Interest Rate (Average) 7.2% 7.5% 7.3% 7.3% Private Consumption Spending 4.2% 4.2% 4.6% 4.6% Real Total Payroll Growth 6.0% 5.9% 5.3% 5.3% Source: Santander historicals and forecasts. RISKS TO INVESTMENT THESIS Our upside risks include: Faster private consumer spending growth in Mexico; Lower-than-expected raw material costs in Mexico; and Less competition from B-brands. U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

10 Recent Latin American Acquisitions Appear Priced in; Downgrading on Valuation Figure 11. Coca-Cola FEMSA Volume Assumptions (Millions of Unit Cases), E Mexico Soft Drink Mexico Water Mexico Other Mexico Beverage Latincentro Soft Drink Latincentro Water Latincentro Other Latincentro Beverage Mercosur Soft Drink Mercosur Water Mercosur Other Mercosur Beverage Consolidated Soft Drink Consolidated Water Consolidated Other Consolidated Volume Volume Growth (%) Mexico Soft Drink 2.0% 2.3% 3.0% 2.5% Mexico Water 9.7% 5.0% 4.0% 3.5% Mexico Other 23.7% 145.8% 5.0% 5.0% Mexico Beverage 3.7% 4.3% 3.3% 2.8% Latincentro Beverage 8.3% 3.4% 3.5% 3.4% Mercosur Beverage 9.7% 6.2% 4.6% 4.6% Consolidated Volume Growth 6.2% 4.5% 3.6% 3.4% 10

11 FINANCIAL STATEMENTS Figure 12. Coca-Cola FEMSA Income Statement, Balance Sheet, and CF Statement, E (U.S. Dollars in Millions) Income Statement 2007 % 2008E % 2009E % 2010E % Sales 6, % 7, % 7, % 7, % Cost of Sales 3, % 3, % 3, % 4, % Gross Profit 3, % 3, % 3, % 3, % Oper. and Adm. Expenses 2, % 2, % 2, % 2, % Operating Profit 1, % 1, % 1, % 1, % Depreciation % % % % EBITDA 1, % 1, % 1, % 1, % Net Interest Expense % % % % Monetary Gain/Loss (92) -1.5% (5) -0.1% (6) -0.1% (6) -0.1% FX Gain/Loss (9) -0.1% (29) -0.4% (29) -0.4% (28) -0.4% Other Income/Expenses (64) -1.0% (64) -0.9% (58) -0.8% (48) -0.6% Profit before Taxes % 1, % 1, % 1, % Tax Provision % % % % Majority Net Profit % % % % Balance Sheet 2007 % 2008E % 2009E % 2010E % Assets 7, % 8, % 8, % 9, % Short-Term Assets 1, % 1, % 2, % 2, % Cash and Equivalents % % % 1, % Accounts Receivable % % % % Inventories % % % % Other Short Term Assets % % % % Fixed Assets 2, % 2, % 2, % 2, % Goodwill % % % % Intangibles 3, % 3, % 3, % 3, % Liabilities 3, % 3, % 3, % 2, % Short-T. Liabilities 1, % 1, % 1, % 1, % Suppliers % % % % Short Term Debt % % % % Other ST Liabilities % % % % Long Term Debt 1, % 1, % 1, % % Other Liabilities % % % % Majority Net Worth 4, % 5, % 5, % 6, % Net Worth 4, % 5, % 5, % 6, % Minority Interest % % % % Net Debt 1, % % % % Cash Flow 2007 % 2008E % 2009E % 2010E % Net Majority Earnings Non-Cash Items/Other Changes in Working Capital (135) (29) (7) (8) Capital Increases/Dividends Change in Debt (119) (101) (252) (252) Capital Expenditures (620) (400) (425) (352) Net Investments (185) (258) 0 0 Net Cash Flow Beginning Cash Flow Ending Cash Flow ,359 U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

12 Recent Latin American Acquisitions Appear Priced in; Downgrading on Valuation Figure 13. Coca-Cola FEMSA Income Statement, Balance Sheet, and CF Statement, E (Millions of Nominal Mexican Pesos) Income Statement 2007 % 2008E % 2009E % 2010E % Sales 69, % 77, % 82, % 88, % Cost of Sales 35, % 40, % 42, % 45, % Gross Profit 33, % 37, % 39, % 42, % Oper. and Adm. Expenses 21, % 24, % 26, % 28, % Operating Profit 11, % 12, % 13, % 14, % Depreciation 1, % 1, % 2, % 2, % EBITDA 14, % 15, % 16, % 18, % Net Interest Expense 1, % % % % Monetary Gain/Loss (1,007) -1.5% (56) -0.1% (63) -0.1% (64) -0.1% FX Gain/Loss (99) -0.1% (317) -0.4% (317) -0.4% (317) -0.4% Other Income/Expenses (702) -1.0% (694) -0.9% (644) -0.8% (544) -0.6% Profit before Taxes 10, % 11, % 12, % 14, % Tax Provision 3, % 3, % 3, % 4, % Majority Net Profit 6, % 8, % 8, % 9, % Balance Sheet 2007 % 2008E % 2009E % 2010E % Assets 87, % 94, % 99, % 106, % Short-Term Assets 17, % 19, % 23, % 28, % Cash and Equivalents 7, % 8, % 10, % 15, % Accounts Receivable 4, % 5, % 6, % 6, % Inventories 3, % 3, % 3, % 4, % Other Short Term Assets 1, % 1, % 2, % 2, % Fixed Assets 21, % 26, % 28, % 29, % Goodwill 5, % 5, % 5, % 5, % Intangibles 42, % 42, % 42, % 42, % Liabilities 36, % 35, % 34, % 32, % Short-T. Liabilities 16, % 14, % 14, % 15, % Suppliers 6, % 6, % 7, % 7, % Short Term Debt 5, % 2, % 2, % 1, % Other ST Liabilities 5, % 5, % 5, % 5, % Long Term Debt 14, % 15, % 13, % 11, % Other Liabilities 6, % 5, % 5, % 5, % Majority Net Worth 49, % 56, % 63, % 72, % Net Worth 50, % 58, % 65, % 74, % Minority Interest 1, % 1, % 1, % 1, % Net Debt 11, % 9, % 4, % -2, % Cash Flow 2007 % 2008E % 2009E % 2010E % Net Majority Earnings 7,103 8,229 9,006 10,162 Non-Cash Items/Other 5,213 2,045 2,414 2,618 Changes in Working Capital (1,475) (314) (77) (92) Capital Increases/Dividends (831) (945) (1,285) (1,407) Change in Debt (1,302) (1,092) (2,800) (2,849) Capital Expenditures & Inv. (6,772) (4,320) (4,718) (3,973) Net Investments (2,020) (2,784) 0 0 Net Cash Flow 1, ,539 4,459 Beginning Cash Flow 4,473 7,542 8,361 10,900 Ending Cash Flow 7,542 8,361 10,900 15,359 12

13 Figure 14. KOF Mexico Income Statement E (U.S. Dollars in Millions) Mexico Beverage Sales 2,967 3,198 3,302 3,428 Other Mexico Sales Total Mexican Sales 2,981 3,212 3,317 3,442 Depreciation Cost of Sales 1,340 1,443 1,470 1,519 Gross Profit 1,558 1,678 1,737 1,806 Gross Margin 52.3% 52.2% 52.4% 52.5% Operating Expense 957 1,029 1,062 1,102 As a Pct of Sales 32.1% 32.0% 32.0% 32.0% Operating Income Operating Margin 20.2% 20.2% 20.4% 20.5% Non-Cash Items EBITDA EBITDA margin 25.2% 25.2% 25.4% 25.5% Figure 15. KOF Mexico Income Statement, E (Millions of Nominal Mexican Pesos) Mexico Beverage Sales 32,398 34,534 36,657 38,728 Other Mexico Sales Total Mexican Sales 32,550 34,691 36,819 38,894 Depreciation ,220 1,324 Cost of Sales 14,629 15,585 16,315 17,160 Gross Profit 17,013 18,117 19,284 20,410 Gross Margin 52.3% 52.2% 52.4% 52.5% Operating Expense 10,444 11,110 11,791 12,456 As a Pct of Sales 32.1% 32.0% 32.0% 32.0% Operating Income 6,569 7,008 7,493 7,954 Operating Margin 20.2% 20.2% 20.4% 20.5% Non-Cash Items EBITDA 8,218 8,755 9,341 9,903 EBITDA margin 25.2% 25.2% 25.4% 25.5% U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

14 Recent Latin American Acquisitions Appear Priced in; Downgrading on Valuation Figure 16. KOF Latincentro Income Statement E (U.S. Dollars in Millions) Latincentro Beverage Sales 1,968 2,249 2,482 2,623 Other Latincentro Sales Total Latincentro Sales 1,972 2,252 2,485 2,627 Depreciation Cost of Sales 1,041 1,186 1,299 1,370 Gross Profit 886 1,016 1,126 1,193 Gross Margin 44.9% 45.1% 45.3% 45.4% Operating Expense As a Pct of Sales 33.2% 33.0% 33.1% 33.1% Operating Income Operating Margin 11.7% 12.1% 12.3% 12.3% Non-Cash Items EBITDA EBITDA margin 15.9% 16.1% 16.2% 16.2% Figure 17. KOF Latincentro Income Statement, E (Millions of Nominal Mexican Pesos) Latincentro Beverage Sales 21,492 24,286 27,552 29,640 Other Latincentro Sales Total Latincentro Sales 21,526 24,321 27,588 29,677 Depreciation Cost of Sales 11,363 12,804 14,421 15,476 Gross Profit 9,668 10,978 12,502 13,479 Gross Margin 44.9% 45.1% 45.3% 45.4% Operating Expense 7,139 8,028 9,120 9,825 As a Pct of Sales 33.2% 33.0% 33.1% 33.1% Operating Income 2,529 2,951 3,383 3,654 Operating Margin 11.7% 12.1% 12.3% 12.3% Non-Cash Items EBITDA 3,428 3,904 4,461 4,812 EBITDA margin 15.9% 16.1% 16.2% 16.2% 14

15 Figure 18. KOF Mercosur Income Statement E (U.S. Dollars in Millions) Mercosur Beverage Sales 1,381 1,698 1,625 1,722 Other Mercosur Sales Total Mercosur Sales 1,388 1,722 1,648 1,745 Depreciation Cost of Sales Gross Profit Gross Margin 44.0% 44.0% 44.5% 45.2% Operating Expense As a Pct of Sales 28.6% 30.3% 30.0% 29.7% Operating Income Operating Margin 15.4% 13.7% 14.5% 15.5% Non-Cash Items EBITDA EBITDA margin 18.3% 16.6% 17.4% 18.4% Figure 19. KOF Mercosur Income Statement, E (Millions of Nominal Mexican Pesos) Mercosur Beverage Sales 15,079 18,343 18,034 19,452 Other Mercosur Sales Total Mercosur Sales 15,155 18,594 18,292 19,719 Depreciation Cost of Sales 8,244 10,143 9,821 10,447 Gross Profit 6,669 8,188 8,146 8,920 Gross Margin 44.0% 44.0% 44.5% 45.2% Operating Expense 4,340 5,634 5,488 5,857 As a Pct of Sales 28.6% 30.3% 30.0% 29.7% Operating Income 2,329 2,553 2,658 3,063 Operating Margin 15.4% 13.7% 14.5% 15.5% Non-Cash Items EBITDA 2,768 3,093 3,184 3,622 EBITDA margin 18.3% 16.6% 17.4% 18.4% U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

16 Recent Latin American Acquisitions Appear Priced in; Downgrading on Valuation IMPORTANT DISCLOSURES Coca-Cola FEMSA 12-Month Relative Performance (U.S. Dollars) Coca-Cola Fem sa IPC J-07 A-07 O-07 D-07 F-08 A-08 J-08 Sources: Bloomberg and Santander. Coca-Cola FEMSA Three-Year Stock Performance (U.S. Dollars) H $ /21/05 H $ /9/06 H $ /25/06 U $ /15/07 H $ /11/07 3,500 3,000 2,500 2,000 1,500 1,000 Analyst Recommendations and Price Objectives SB: Strong Buy B: Buy H: Hold UP: Underperform S: Sell UR: Under Review 17 M-05 J-05 S-05 D-05 M-06 J-06 S-06 D-06 M-07 J-07 S-07 D-07 M-08 Coca Cola Femsa (L Axis) IPC (R Axis) 500 Source: Santander. 16

17 Key to Investment Codes IMPORTANT DISCLOSURES Rating Definition % of Companies Covered with This Rating % of Companies Provided Investment Banking Services in the Past 12 Months Buy Expected to outperform the local market benchmark by more than 5.0% % 70.59% Hold Expected to perform within a range of 5.0% above or below the local market benchmark % 29.41% Underperform/Sell Expected to underperform the local market benchmark by more than 5.0%. 5.13% The numbers above reflect our Latin American universe as of Friday, May 9, For a discussion, if applicable, of the valuation methods used to determine the price targets included in this report and the risks to achieving these targets, please refer to the latest published research on these stocks. Research is available through your sales representative and other electronic systems. Target prices are 2008 year-end unless otherwise specified. Recommendations are based on a total return basis (expected share price appreciation + prospective dividend yield) unless otherwise specified. Stock price charts and rating histories for companies discussed in this report are also available by written request to Santander Investment Securities Inc., 45 East 53 rd Street, 17 th Floor (Attn: Research Disclosures), New York, NY USA. Ratings are established when the firm sets a target price and/or when maintaining or reiterating the rating. Ratings may not coincide with the above methodology due to price volatility. Management reserves the right to maintain or to modify ratings on any specific stock and will disclose this in the report when it occurs. Valuation methodologies vary from stock to stock, analyst to analyst, and country to country. Any investment in Latin American equities is, by its nature, risky. A full discussion of valuation methodology and risks related to achieving the target price of the subject security is included in the body of this report. The benchmark used for local market performance is the country risk of each country plus the 1-year U.S. Treasury yield plus 5.5% of equity risk premium, unless otherwise specified. The benchmark plus or minus the 5.0% differential used to determine the rating is time adjusted to make it comparable with the total return of the stock over the same period. For additional information about our rating methodology, please call (212) This report has been prepared by Santander Investment Securities Inc. ( SIS ) (a subsidiary of Santander Investment I S.A which is wholly owned by Banco Santander, S.A. ("Santander"), on behalf of itself and its affiliates (collectively, Grupo Santander) and is provided for information purposes only. This document must not be considered as an offer to sell or a solicitation of an offer to buy any relevant securities (i.e., securities mentioned herein or of the same issuer and/or options, warrants, or rights with respect to or interests in any such securities). Any decision by the recipient to buy or to sell should be based on publicly available information on the related security and, where appropriate, should take into account the content of the related prospectus filed with and available from the entity governing the related market and the company issuing the security. This report is issued in Spain by Santander Central Hispano Bolsa, Sociedad de Valores, S.A. (SCH Bolsa), and in the United Kingdom by Banco Santander, S.A., London Branch (Santander London), which is regulated by the Financial Services Authority in the conduct of investment business in the UK. This report is not being issued to private customers. SIS, Santander London, and SCH Bolsa are members of Grupo Santander. The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed, that their recommendations reflect solely and exclusively their personal opinions, and that such opinions were prepared in an independent and autonomous manner, including as regards the institution to which they are linked, and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report, since their compensation and the compensation system applying to Grupo Santander and any of its affiliates is not pegged to the pricing of any of the securities issued by the companies evaluated in the report, or to the income arising from the businesses and financial transactions carried out by Grupo Santander and any of its affiliates: Alexander Robarts and Sergio Matsumoto. Grupo Santander receives non-investment banking revenue from the subject company. The information contained herein has been compiled from sources believed to be reliable, but, although all reasonable care has been taken to ensure that the information contained herein is not untrue or misleading, we make no representation that it is accurate or complete and it should not be relied upon as such. All opinions and estimates included herein constitute our judgment as at the date of this report and are subject to change without notice. Any U.S. recipient of this report (other than a registered broker-dealer or a bank acting in a broker-dealer capacity) that would like to effect any transaction in any security discussed herein should contact and place orders in the United States with SIS, which, without in any way limiting the foregoing, accepts responsibility (solely for purposes of and within the meaning of Rule 15a-6 under the U.S. Securities Exchange Act of 1934) for this report and its dissemination in the United States by Santander Investment Securities Inc. All Rights Reserved. 2008