Canadian beer giant Molson Inc. and Adolph Coors Co. ended a week of speculation Thursday, unveiling a $6-billion (U.S.) merger that will transform the two family-controlled companies into what they say will be the world's fifth-largest brewer by volume.
The one-for-one share swap, which still needs to be approved by shareholders, would create the Molson Coors Brewing Company, with combined annual sales of $6-billion, free cash flow of $707-million, and beer sales of 51 million U.S. barrels, the companies said in a press release.
"This combination is about unlocking shareholder value for shareholders, all shareholders," Coors Chief Executive Leo Kiely told a joint press conference in New York.
The combined companies will have increased financial capacity and market clout in an industry that is consolidating rapidly, putting them on a better footing to compete with international brewing giants Anheuser-Busch Cos. and Interbrew SA.
Although Molson and Coors said the merger will vault them into the No. 5 spot among the world's brewers, Merrill Lynch said in a report Thursday that, by its calculations, the new company will be the world's seventh biggest brewer by volume.
"The merger of equals suggests no premium for either shareholder, and suggests a value of $3-billion for each Coors and Molson," analyst Christine Farkas wrote in a commentary.
Coors falls, Molson climbs
Shares of Coors slipped 2.3 per cent to $72.40 in New York Thursday while Molson's Class A stock gained 2.9 per cent to $35.70 in Toronto.
Two-thirds each of Molson's Class A and Class B shareholders must approve the agreement for the merger to proceed. Members of the Molson family control at least 55 per cent of the Class B voting shares.
"As the Molson founding family, the Molsons have been long-term investors in the company," Molson chairman Eric Molson said at a New York press conference. "We aren't interested in exiting the business. Rather, the family wants to play a role in building a major global brewer and deriving greater value for our shareholders."
Speculation remains, however, that minority shareholders will want a better deal. Several companies are examining the prospect of launching rival bids for Molson and Coors to pre-empt the planned combination, The Globe and Mail reported Thursday. Bidders could include buyout specialist Onex Corp. of Toronto and a group put together by Molson director Ian Molson.
Molson has recently been embroiled in a power struggle between chairman Eric Molson, 66, and cousin Ian Molson, 49, who stepped down from his position as deputy chairman at the annual general meeting in June.
Ian Molson is expected to make a formal offer of as much as $4-billion to acquire Molson, potentially thwarting the merger agreement between Molson and Coors, the Wall Street Journal reported Thursday.
Quoting people familiar with the situation, the newspaper said Ian Molson is expected to make an offer that has financial backing from a major Canadian financier and several global financial firms, as well as possibly a corporate partner, in the coming two days.
The Journal said the Ian Molson-led offer would value the stock at around 40 Canadian dollars (about US$30) a share, creating a premium of more than 30 per cent from the company's share price before the news of the Coors deal started leaking to the market. Under the Coors deal, described as a merger of equals, the companies are each valued at about $3-billion (U.S.).
There is no guarantee, however, that Ian Molson's offer will appeal to shareholders.
Merger of equals
Coors was founded in 1873 and is the third-largest brewer in the United States. Molson was founded in 1786 and has 43 per cent market share in Canada. Molson is also the third-largest brewer in Brazil.
The companies said Thursday they foresee $175-million in annual savings from the union, with the deal being accretive to shareholders within the first year.
Legg Mason analyst Mark Scwartzberg said Thursday he does not believe the deal will produce great synergies. "We see little synergistic about the combination...," he said. "With the limited expectation of Canada, the combination of the businesses in a given market involves one company's meaningful market position pairing up with the other company's small-to-nonexistent position."
Credit Suisse First Boston analyst Andrew Conway also described the $175-million in estimated synergies as aggressive but was largely positive on the union between the brewers. "We view the merger as generally favourable as it increases the flexibility of the combined enterprise. However, we do view the merger as primarily defensive in nature."
In terms of who will run the new company, Eric Molson will be the chairman of the new company, Daniel O'Neill, current Molson CEO, will be vice-chairman. Mr. Kiely, Coors CEO, will keep the same position in the merged company.
Molson Coors would have a 15-member board, with five nominated from the Molson family, five from the Coors family and three selected by the shareholders. Mr. O'Neill and Mr. Kiely would be directors.
The company will have dual head offices in Denver, Colo. and Montreal. Its Canadian operations will be managed from Toronto.
Shareholders to vote this fall
Shareholders of both companies will vote on the merger this fall. The boards of the two companies have recommended the deal.
The agreement sets a $75-million breakup fee to either party if the deal falls apart.
"The transaction is structured as a share exchange whereby Molson shareholders can either convert their shares to shares of the new entity or can elect to receive exchangeable shares on a tax-deferred basis," the companies said.
The new company will be listed primarily on the New York stock exchange with exchangeable shares on the Toronto Stock Exchange.
The two companies already have a commercial relationship under which they brew and sell each others' brands in Canada and the United States.
Separately, both companies released their latest earnings on Thursday. Coors's second-quarter profit fell 5.6 per cent on sluggish U.S. beer sales. Profit slipped to $72 million (U.S.) or $1.90 a share, from $76.3 million, or $2.09, a year earlier. Sales rose 4.5 per cent to $1.15-billion from $1.10 billion.
Molson committed to Brazil
Molson reported that net profit rose to $68.3-million (Canadian) or 53 cents a share in the three months ended June 30 from $54.7-million or 42 cents a year earlier. Excluding special charges for restructuring and gains, profit fell to $68.3-million from $84.6-million in the same quarter last year. Sales rose to $675-million from $661.8-million.
The Montreal-based company has been struggling with flat sales in Canada and a faltering growth strategy in Brazil. But on Thursday, executives said the merged company has no plans to exit Brazil.
"While Molson has encountered issues with its Brazilian company in its overall operations, there's a clear plan in place to revive and move that business ahead," Mr. O'Neill said.
RBC Capital markets analyst Irene Nattel said Thursday results from Molson's unit in Brazil were disappointing. She noted that sales fell 7.8 per cent in Canadian dollars while volume fell 2.9 per cent. She placed her recommendation on the stock and earnings estimates under review.