MOLSON’S DEAL HARD TO SWALLOW
Shares fall 5%, Moody’s lowers ratings on 3 units
MONTREAL • Molson Coors Brewing Co. is trying to free itself from its tri-nation straitjacket by buying into the beerswilling market of Eastern Europe.
But the company may find not everyone chugs back suds with the enthuasiasm of the Czechs. Molson said Tuesday it is buying Prague-based Starbev LP for Us$3.54-billion as it pushes outside its base of Canada, the United States and the United Kingdom to offset declining consumption.
The purchase price is 11 times Starbev’s 2011 earnings before interest, taxes, depreciation and amortization of Us$322-million. Starbev employs 4,100 people and brews beer at nine plants in the Czech Republic, Serbia, Crotia, Romania, Bulgaria and Montenegro.
It’s easy to see the logic of the deal for Molson. Unlike many of the company’s key rivals, it
has limited geographical diversification. And it faces serious issues on home turf.
Many of its core customers in the United States and Britain, men aged 21 to 25, are caught in the jobs slump, leading commentators to talk about a “lost generation” of young people.
Canada’s young are also underemployed, with job rates among people aged 15 to 24 falling for the fifth consecutive month in February. Here, Molson Coors also faces stiff competition from non-beer products such as coolers and ready-mixed alcohol drinks.
It all adds up to stagnant sales for Molson in the three markets and a big opportunity to double international sales, which represent less than 10% of current pro-forma revenues.
But analysts are warning not all the markets the brewer is buying into are alike. Starbev’s business and share vary greatly across the region depending on the country. And therein lies the challenge.
Buying Starbev gives Molson an estimated 16% market share in the Czech Republic, a stable market that has the world’s highest beer consumption per capita. Meanwhile, the deal gives it a share over 40% in Croatia and Serbia, Balkan nations whose region was at war until 1995.
”We are not convinced this is a good transaction,” said Stifel Nicolaus analyst Mark Swartzberg in a note. He added that Starbev’s EBITDA margin is 34%, a potential “peak level.”
Digesting operations in nine major countries is more complicated than buying a brewer in one country, said Moody’s Investors Service vice-president Linda Montag. “You’ve got different beer brands, different distribution, different stage of development of the middle class,” Ms. Montag said. “It’s just more complexity.”
Moody’s lowered the ratings of three Molson Coors subsidiaries to Baa2 from Baa1 after the deal was announced, citing added debt the brewer will take on. Ms. Montag noted beer consumption in central and eastern Europe has been volatile in past recessions, which may bring greater fluctuation in Molson’s financial results.
Investors shared the analyst anxiety, bidding Molson Coors shares down 5% to $43.18 in trading in New York.
Denver-based Molson, the maker of Coors Light and Carling Lager, said it has the financing ready to acquire the business from private-equity firm CVC Capital Partners Ltd. and Starbev management. The brewer said it expects the transaction to be accretive to
earnings in the first full year of operations and add about $50million of pre-tax operational synergies by 2015.
Global brewery deals totalled Us$141.9-billion in the five years up to March 2011, according to Bloomberg data.
Starbev has more than 20 brands, including flagship brew Staropramen. Its 2011 sales were Us$1-billion. It also distributes brands like Stella Artois and Beck’s under licence.
European competition authorities have to approve the
takeover, which is expected to close in the second quarter. Starbev will operate as a separate business unit within Molson Coors and remain headquartered in the Czech Republic.