Brewers' merger talks more family than money :: Namibia Internet Gateway cc ::

Articles: Brewers' merger talks more family than money

Posted by admin on Tuesday, July 20, 2004 - 01:17 AM

In the middle of the Rocky Mountain city of Golden, Colo., the world's largest brewery hums along, churning out the equivalent of 750,000 cases of beer a day. It's an impressive facility, the home of a beer empire started in the 1870s by Adolph Coors.
It is also a monument to folly. Coors Brewing Co. sells in all 50 states, yet continues to produce most of its beer out of that single complex, trucking it thousands of kilometres to stores and bars across the United States at enormous cost. That's one of the reasons parent Adolph Coors Co. is considered one of the weakest of the big North American brewing companies. For every dollar in sales last year, Coors made less than 8 cents in operating profit; Anheuser-Busch made 22 cents. A family-controlled brewery that's guided as much by tradition and old loyalties as what's best for shareholders. Haven't we seen this before? And that's the trouble with a so-called "merger of equals" between Coors and Molson Inc. Both suffer from similar, and serious, afflictions, and it's not clear marriage will help either solve their problems. From Molson's point of view, the attraction is dealing with the devil you know. The two companies already sell Coors Light in Canada under a joint venture agreement that has become critical to Molson's profitability. Coors' annual report indicates the partnership earned about $95-million (U.S.) before taxes in 2003. That's a little more than $120-million (Canadian) at year-end exchange rates, and Molson's share is half (actually 49.9 per cent), or about $60-million. Molson earned less than $400-million in pretax profit in its most recent fiscal year, so the Coors deal is clearly something they want to hold on to. In truth, the partnership is even more important than the numbers suggest. Molson doesn't just sell Coors here; it brews it, which soaks up extra capacity in Molson's plants, rendering them more efficient. Even then, Molson's breweries operate at just 75 per cent of capacity, rising to 85 per cent in the peak summer season. Without Coors Light, which has about 8.5 per cent of the beer market in Canada, the overcapacity problem would be even worse. In the United States, the two operate under a similar agreement. Coors promotes Molson brands, principally Molson Canadian, but the venture continues to lose money. A merger, presumably, would give Molson management more control over how their beer is distributed and sold, and help increase volumes. Finally, there's the matter of size. Molson's market capitalization of $4.25-billion is slightly larger than Coors'. The Molson family would retain a big say in the business, which makes the merger more attractive to some of the die-hards (principally chairman Eric Molson) than, say, selling out to Heineken. Those are the good points, from Molson's perspective. But for each of them, you can find an equally compelling reason why Coors would make a poor partner. Quick: name one Coors brand other than Coors Light. A pint of Blue Moon Belgian White, anyone? How about a cold Killian's Irish Red? This is a company far too dependent on one product, just as Molson is too reliant on Canadian. Both companies' key brands are losing market share. Cost-cutting opportunities -- "synergies," in Wall Street speak -- would be modest. It's not as though Molson could immediately satisfy demand from Coors beer drinkers in New York and Boston from its breweries in Toronto and Montreal. Outside of North America, Molson operates in Brazil, Coors in the United Kingdom. Yes, a merger would cement the profitable Coors Light joint venture, and that might be a good thing. On the other hand, other partners would bring similar possibilities. Heineken is a well-known brand that hasn't come close to reaching its potential in Canada -- and Heineken, unlike Coors, is a truly global beer company, with deep pockets and an even deeper understanding of foreign markets. Heineken already owns 20 per cent of Molson's Brazilian operation, which has been a dud. Would it be able to turn it around if it had control? It would have a better chance than Coors. "Coors can't do much for Molson in Brazil," CIBC World Markets analyst Michael Van Aelst said yesterday. So what's driving the two to get together? They gave a hint yesterday: The two sides have no deal yet, but they've already worked out who will be sitting in what chair. Eric Molson would be chairman, Coors CEO Leo Kiely running the combined company and Molson boss Dan O'Neill in charge of "synergies and integration." So there it is: This merger is -- would be -- as much about people issues as business sense. Eric Molson may want to keep control, but he knows that cousin Ian Molson is (a) owner of $75-million worth of stock, (b) an ex-Wall Street investment banker with connections, and (c) motivated to get the best deal, if a deal's got to be done. The feud between the two, which led to Ian Molson's departure from the board last month, started a frenzy of speculation on Bay Street. Don't think for a moment that a Coors merger is the only option just because Eric Molson has voting control of the company. Other bidders may come calling. This is not over. It's probably just beginning.

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