Molson Coors Brewing. For some reason, the name of the proposed new company doesn't sound just right to me, but then I wasn't invited to the bargaining table where Molson and AdolphCoors (NYSE:RKY) recently signed a pact to merge the two family-run beer empires. Yet, barring a last-minute rival bid for Molson by former deputy chairman Ian Molson, the two firms will unite to form the world's fifth-largest beer company by volume.
Ian Molson's offer appears to be a long shot at this point, but the $4 billion price tag attached to the deal (representing a 30% premium) may sway some shareholders. By contrast, the arrangement with Coors has been billed as a merger of equals, with no premium attached. Under the terms, both Molson and Coors shares would be exchanged for shares in the new combined company, with former Molson shareholders controlling 55%.
Together, Molson and Coors have sales exceeding $6 billion with total volume of 51 million barrels. In a game where size and corresponding economies of scale are vital, the larger entity would be on better footing to compete with SABMiller ($8 billion sales) and Anheuser-Busch (NYSE:BUD), with $14 billion in sales and more than half of the domestic beer market, which last year crept up to $197.5 million barrels.
According to company projections, such synergies as "optimization of brewery networks" and "consolidation of administrative functions" will deliver up to $175 million in annual savings by 2007. Other advantages related to the merger, however, are not as conspicuous. As was pointed out by colleague Dave Marino-Nachison, both sides already had agreements in place to sell each other's brands. In fact, Coors accounted for 25% of Molson's net income last year. Furthermore, from strictly a geographic standpoint, there seems to be little operational overlap between the Colorado-based Coors and the Montreal-based Molson.
Separately, Coors released soft second-quarter financials this morning that point out the need for a partner in the consolidating global beer industry. As was the case last quarter, domestic weakness was offset by growth in the Canadian and European markets. The Americas segment revenues fell 1.8% on a 5.2% drop in volume to 6 million barrels, but pre-tax earnings in Canada jumped 26.3% to $15 million and European sales, earnings, and volume were all higher. Overall, earnings per share declined 9.1% to $1.90 on a 4.6% rise in revenues to $1.15 billion.
This merger may not be the perfect solution, but clearly changes needed to be made at Coors, as little headway has been made in the three-way domestic fray. There's been virtually no help from the flat domestic market -- 2003 volume grew 1/10 of 1%, and per-capita consumption declined for the third straight year. So success will come from operational efficiencies and cost-cutting initiatives, expansion in foreign markets, and recapturing market share from SABMiller and Anheuser-Busch -- three areas that Coors will be better-equipped to address after the union with Molson.
Fool contributor Nathan Slaughter prefers Mexican beer to Canadian and owns none of the companies mentioned.
