Mexico Says No to Coke

It's been a week of tough going for Mexican Coca-Cola bottler Coca-Cola FEMSA (NYSE:KOF) and its parent FEMSA (NYSE:FMX).

Last Friday, the company revealed (opens a PDF file) that its proposed purchase, along with Coca-Cola (NYSE:KO), of juice producer Jugos del Valle was probably going to be blocked by Mexican competition authorities for reasons that went unstated, except that the politicos must believe that the acquisition would be anticompetitive.

On the heels of that announcement, reports hit the wires describing the government dropping the hammer on Coca-Cola FEMSA and 13 other bottlers for "monopolistic" practices. The hammer isn't that heavy, at least not for our friends at FEMSA, as the company can easily afford the $1 million per-bad-guy tab. But this may be about more than the money.

Currently, Coca-Cola dominates the Mexican soft-drink market, with PepsiCo's (NYSE:PEP) marquee product a distant second. That's been good for shareholders, but good things sometimes attract the worst kind of attention.

If the Calderon government decides that a pro-business stance means reining in the giants, shareholders in FEMSA (and I'm one of them) will have to keep a sharp eye out for harsher remedies down the road. Part of the beauty of FEMSA is its dominant position and vertical integration, especially its ability to market its own products through Oxxo, its rapidly-growing chain of corner convenience stores.

Shorn of competitive (or anticompetitive, depending on whom you ask) strengths, neither FEMSA nor Coca-Cola FEMSA would be quite as sweet.

FEMSA is up 37% (versus 23% for the S&P 500) since Seth recommended it to Fool readers in June 2006. See what kind of values he's finding these days as part of the team at Motley Fool Global Gains.

Global Gains lead analyst Bill Mann departs for China, India, and Taiwan on June 2 in search of new investment opportunities in some of the world's fastest-growing economies. Get updates and analysis live from the field by sending Bill an email at [email protected].

At the time of publication, Seth Jayson had shares of FEMSA, but no positions in any other company mentioned here. See his latest blog commentary here. View his stock holdings and Fool profile here. Coca-Cola is a Motley Fool Inside Value recommendation. Fool rules are here.