Heineken NV will buy the beer business of Mexico's FEMSA in a $5.7 billion deal that boosts the Dutch brewer's emerging-markets presence and cements an alliance with one of Latin America's biggest drinks firms.

Heineken , the world's third-largest brewer, said on Monday the all-stock purchase would make FEMSA its second largest shareholder -- with a 20 percent stake -- and give it access to the boardroom.

The deal is competitively priced and broadens Heineken's access to higher-growth markets, analysts said. The company's shares rose 3 percent.

FEMSA shares slid 13.61 percent on disappointment over the deal price after brewer SABMiller pulled out of the auction. SAB was not interested in FEMSA's Brazil operations, sources told Reuters.

FEMSA, which started as a brewer and ice maker in 1890, is the world's second-biggest Coca-Cola bottler, and sells the soft drink in nine Latin American countries. Its chief, Jose Antonio Fernandez, is a Formula 1 enthusiast who doubles as a racing commentator on the ESPN cable television network.

FEMSA's beer unit, home to Dos Equis, Tecate and Sol, gets credit for sparking industrial development in northern Mexico, where glass and steelmakers bottle and cap its brews.

The company operates OXXO, one of the fastest-growing convenience store chains in the region. It has 7,000 units in Mexico and recently expanded into Colombia.

Heineken would secure an operation with 43 percent of the Mexican beer market and a 9 percent share in Brazil. The United States is the most profitable beer market, Heineken said. Brazil is second and Mexico is fourth.

MODELO ARBITRATION A HINDRANCE

The new step in beer consolidation raises the stakes for Anheuser-Busch InBev , the world's biggest brewer, as it wrangles with Mexico's No. 1 brewer Grupo Modelo over Modelo's future.

Modelo and AB InBev have lingered on the sidelines as they await an arbitration panel's ruling on Anheuser-Busch's 50 percent stake in Modelo, which came under dispute once Belgium's InBev bought Anheuser.

With FEMSA's beer operations under Heineken, it would put a global brewing giant squarely in Modelo's home turf. Some analysts think this could be the catalyst that could trigger a more aggressive move of InBev in the Mexican market.

Mexico beer market demographics are good, beer consumption is pretty high and per caps are still growing, said a New York-based analyst who preferred not to be named.

Heineken expects the deal to raise its operating profit from faster-growing markets to 40 percent from 32 percent, Chief Executive Jean-Francois van Boxmeer told Reuters.

The deal, worth $5.7 billion based on Monday's closing share price, also includes $2.1 billion of net debt and pension obligations. The total value -- $7.8 billion -- amounts to an 11.2 percent multiple of enterprise value to EBITDA (earnings before interest, tax, depreciation and amortization).

This is broadly in line with levels for Latin American beer properties, analysts said.

It looks like a reasonable price ... Heineken lacked exposure to emerging markets and it is already selling the (FEMSA) beers into the United States so it protects that, said Bernstein Research analyst Trevor Stirling.

STRENGTHENS FEMSA PARTNERSHIP

Heineken said it expected the transaction to close in the second quarter, provide annual savings of 150 million euros ($215 million) by 2013 and to add to earnings per share within two years.

Heineken will issue 86 million new shares. FEMSA would keep half and exchange the rest for shares of Heineken Holding , which would retain its 50.005 percent stake in Heineken NV.

Heineken would give FEMSA 29 million more shares over the next five years, although FEMSA would earn Heineken dividends for these immediately. Heineken would seek to buy these shares back from the market, Van Boxmeer said.

The deal would give FEMSA 12.5 percent of Heineken NV and 14.9 percent of parent Heineken Holding.

FEMSA will have the right to appoint two non-executive members to Heineken NV's supervisory board, one of them becoming a vice chairman who also would sit on Heineken Holding's board.

FEMSA will remain listed on the Mexican stock exchange and end 2010 with no debt, Fernandez told Reuters. The company's free-cash flow generation will also help bring Coca-Cola FEMSA's debt close to zero, he added.

The Mexican company was advised by Rothschild and Heineken by Credit Suisse.

($1=.6983 euro)

(Additional reporting by Gilbert Kreijger in Amsterdam, and Cyntia Barrera Diaz in Mexico City. Editing by Robert MacMillan, Bernard Orr)

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