The merger of Mexican Coca-Cola bottlers Embotelladores Arca SAB (ARCA.MX, EMBVF) and Grupo Continental (CONTAL.MX), or Contal, is expected to generate annual synergies of $80 million by its third year, company officials said Tuesday.

"We are in the process of preparing all the steps to synergize, in terms of distribution and production," Arca Chief Executive Francisco Garza said on a conference call with investors to discuss the merger, adding that the figure is a conservative estimate.

In response to an analyst's question as to whether plants will be closed, Garza noted that Arca and Contal "have some facilities that are close to other ones; that's clear."

Arca and Contal on Monday announced plans to merge into Latin America's No. 2 Coca-Cola bottler, with annual sales volume above 1.2 billion unit cases. Mexico's Coca-Cola Femsa SAB (KOF, KOF.MX) is the region's top Coca-Cola bottler.

Among the expected benefits of the merger, Garza and Contal Chief Executive Miguel Angel Rabago said, are economies of scale, exchange of best practices, and geographic and product diversification.

Credit Suisse analysts suggested in a report that the new company, to be known as Arca Continental, could boost its efficiency by closing plants. "Mexico could be run with half the bottling capacity currently in place," Credit Suisse said. "Arca has 12 bottling facilities while Contal has 10--average capacity utilization of the combined entity is below 60%."

Arca and Contal's current owners will maintain a 76.3% equity stake in the new company following the transaction. Coca-Cola Co. (KO) will have a 7.7% share derived from its current stake in Contal, while the remaining 16% would float on the stock market. Four families--Arca's Arizpe, Barragan and Fernandez families and Contal's Grossman family--will have "balanced ownership" in Arca Continental via a trust required to hold at least 51% of company stock.

The merger still requires approval by Coca-Cola and local regulators. Company officials said that they expect Mexico's antitrust commission, known as Cofeco, to approve the transaction and that they have gotten positive feedback from Coca-Cola.

Both companies' shares were trading sharply higher on the Mexican Stock Exchange on Tuesday, with Arca up 13% at 66.90 pesos and Contal up 13% at MXN42.74.

Before the merger, the companies plan to propose dividend payments of MXN1.40 per Arca share and MXN2.85 per Contal share. After the merger, Arca Continental will propose an extraordinary dividend of either 0.341 share for each share held or MXN13.60 in cash. The controlling families have already agreed to opt for shares.

"If minority shareholders decide to take the cash, the yield on the extraordinary dividend is close to 23%," Credit Suisse said, referring to share prices as of Monday's close.

Company officials said Arca Continental's capital expenditure will remain similar to the current levels of 5% to 6% of sales, or around MXN2.2 billion per year, after the merger.

The new company will be based in Monterrey, where Arca is headquartered. Though its complete management structure has yet to be defined, Garza and Rabago will remain as top executives.

-By Paul Kiernan, Dow Jones Newswires; (5255)5980-5178; paul.kiernan@dowjones.com