With beer sales declining in its key markets and most of the industry's big consolidation opportunities behind it, Molson Coors Brewing Co. is reaching into Eastern Europe to expand its business, buying a group of former Anheuser-Busch InBev SA cast-off brands for $3.5-billion (U.S.).
Molson Coors, the world's fifth largest brewer, said Tuesday it will purchase StarBev LP from private equity firm CVC Capital Partners, just 28 months after CVC bought the company from ABI for $2.2-billion. The deal will make Molson Coors, based in Denver and Montreal, the top beer seller in four former Yugoslav republics and the second or third largest player in the Czech Republic, Romania, Hungary, Slovakia and Bulgaria. Molson Coors is the second largest brewer by volume in Canada and Britain and co-owns the second largest brewing operation in the U.S., MillerCoors.
Unlike other brewers that sold during the consolidation wave of the last decade, Prague-based StarBev doesn't boast a major global brand. Instead, it owns a hodgepodge of 20 local favourites with such names as Staropramen (StarBev's one modest export success), Kamenitza, Ozujsko and Jelen. StarBev produced 13.3 million hectolitres of beer and $1-billion in revenue last year, compared with 48.4 million hectolitres and $6.7-billion for Molson Coors.
More significant, however, is that beer consumption and GDP growth in StarBev's nine markets are expected to outpace those in Western Europe, Britain, the United States and Canada from 2011 to 2016, rising annually by 2.4 per cent and 3.1 per cent respectively – following a similarly stronger performance from 1998 to 2008. By contrast, beer sales and GDP fell more sharply in StarBev's markets during the recent economic crisis.
"I think we're buying at the right time," said Molson Coors chief executive officer Peter Swinburn, who added the deal will enable his company to accelerate growth in emerging markets, which account for less than 2 per cent of Molson Coors' revenues. He said growth will come primarily from StarBev's core brands in their home markets, rather than a new push to sell flagship brand Coors Light there. The company is paying 11 times StarBev's operating earnings, in line with recent industry deals, and Mr. Swinburn said his company would achieve $50-million in operating synergies by 2015 from StarBev.
The deal disappointed the market, however. Molson Coors stock traded down 5.4 per cent, closing at $43.18 on the New York Stock Exchange, faring worse than other global brewers and the benchmark S&P 500 index.
"We are not convinced this is a good transaction," Stifel Nicolaus analyst Mark Swartzberg said in a research note. He questioned "whether [StarBev's 34-per-cent operating profit margin is]at peak levels," considering ABI earns barely one-third that amount on a larger revenue base in its Eastern European business.
In addition, Mr. Swartzberg speculated Molson Coors would have to increase capital expenditures at a faster pace than earnings growth, while the company won't get a break on the purchase price if ABI pulls out of a distribution agreement that enables StarBev to sell ABI brands such as Stella Artois and Beck's into its markets.
UBS analyst Kaumil Gajrawala said while the expansion into emerging markets was positive, Molson Coors' greatest opportunity to increase shareholder value – and its greatest challenge – remains in its core, declining North America market, which will still account for 69 per cent of volumes after the StarBev deal goes through.
The deal is expected to close by mid-year and increase Molson Coors earnings in the first year. The company will pay for the deal with a combination of cash, debt and convertible debt.