SABMiller's Taste for Molson


By Adrienne Carter The proposed marriage between Adolph Coors (RKY) and Canada's Molson (MLSAF) has played out like a soap opera ever since it was first announced back in July. Now this corporate drama has even more intrigue. With just a couple of weeks to go before shareholders vote on the merger, another suitor for the Canadian brewer has emerged -- SABMiller.

The speculation comes amid a mounting shareholder movement to block the Coors-Molson deal. Under the terms of Coors' original proposal, Molson shareholders would receive 0.36 of a Coors share for each Molson share they own. The $6 billion deal, which would form the world's fifth-largest brewer, was later sweetened to include a special dividend of $316 million to Molson owners. With shareholder concern mounting, Coors again upped the dividend late Thursday, Jan. 13, to $532 million.

TACTICAL FEINT? But large stakeholders like Burgundy Asset Management have recently criticized the proposed merger between Golden (Colo.)-based Coors and the maker of Canada's hometown beer. In particular, dissenting shareholders are concerned that it undervalues Molson, which is considered more profitable than Coors. Even Molson family members have vehemently objected, in part because the merger would essentially mean the extinction of the centuries-old brand.

"I have evaluated the Molson-Coors proposal carefully and have concluded that this is a bad transaction for Molson shareholders," Ian Molson wrote in a Jan. 11 statement. "In my judgment, Molson has an ongoing ability to create value for its shareholders substantially in excess of what is offered by way of the Coors merger proposal."

In the midst of this turmoil, SABMiller -- which owns the No. 2 light beer in the U.S., Miller Lite -- has voiced an interest in its rival to the North. Some have speculated that Miller's fascination with Molson may be partly mischievous. That line of thinking figures Miller could be trying to drive up Molson's price, forcing Coors to pay more dearly for the Canadian brewer.

PRIME TERRITORY. "It's in SABMiller's best interest to make Coors overpay for Molson," says Harry Schuhmacher, publisher of Beer Business Daily. "For one, it gives them less money to advertise."

But the deal also makes strategic sense for Miller. Coming out from under the shadow of former owner Philip Morris (now Altria, MO), Miller -- which was bought by South African Brewers in 2002 -- has been aggressively trying to gain share in part by taking on the No. 1 U.S. player, Anheuser-Busch (BUD). A Molson deal would give Miller better access to specific markets and potentially improve margins. Still, digesting Molson wouldn't be easy.

From SABMiller's perspective, Molson is a premier property. It owns Canada's No. 1 brand and has a 43% share of the country's market. That would give SABMiller a far stronger footprint in the region, which is a good place to sell beer. Canada, despite the proliferation of exports there in recent years (including Miller Lite), is mostly dominated by just two brands -- Molson and Labatt.

MARGIN ENHANCING. By gaining such a portfolio of brands, the deal could ultimately translate into a big financial win for SABMiller. For one, there are potential synergies. A Coors-Molson deal is expected to realize $175 million in annual cost savings for the combined entity. So, a SABMiller-Molson could no doubt reap some savings as well.

More important, though, such a merger could be a margin-enhancing deal for SABMiller. Thanks to Molson's hefty market share, the Canadian rival boasts impressive EBIDTA (earnings before interest, depreciation, taxes, and amortization) margins of 15.5%. SABMiller has an EBIDTA margin of 14.9%.

"A Molson transaction would both have strategic merit and could be value-enhancing to SABMiller," says Nigel Fairbrass, head of corporate communications for SABMiller. "If the Coors deal is voted down by Molson shareholders, we would welcome the opportunity to discuss a potential transaction that may be attractive to both Molson shareholders and ours."

TANGLED TURF. But making this merger work would be a challenge. The biggest problem for SABMiller may be untangling Coors and Molson. The latter brews Coors in Canada. They also have offices together in the U.S. and distribution deals on each other's home turf. "For all intents and purposes, they've already merged," says Schuhmacher. If the merger falls through, he adds, "Molson risks losing the Coors business in Canada, which is a pretty big deal."

But the merger's first hurdle will be shareholders. The Coors-Molson vote will be completed in the beginning of February. If it ultimately goes against the marriage, SABMiller will have its shot at Molson. In that case, SABMiller management will need to carefully weigh the rewards against the challenges. But as most beer drinkers know, you can't chug a brew without a few potential hiccups Carter is a correspondent in BusinessWeek's Chicago bureau


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