In order to extend its territory in the markets of Central and Eastern Europe, the US-Canadian brewer Molson Coors Brewing Company (TAP) has agreed to purchase the East European brewer StarBev L.P. from private equity group CVC Capital Partners Limited. The transaction is expected to consummate in the second quarter of 2012, pending regulatory approval by European authorities.
The deal is finalized for 2.65 billion euros ($3.54 billion). Molson Coors will finance it using a combination of cash in hand and debt of $3.0 billion, and by issuing an additional 500 million euros ($667 million) of convertible debt. Morgan Stanley Senior Funding, Inc., a unit of Morgan Stanley (MS) and Deutsche Bank Securities, an arm of Deutsche Bank AG (DB) will help financing the debt for the transaction.
StarBev currently operates nine breweries in Central and Eastern Europe and holds a top three market share position in each of its markets. It has a strong portfolio of more than 20 brands such as Borsodi, Kamenitza, Bergenbier, Ozusko, Jelen and Niksicko.
StarBev also distributes brands such as Stella Artois, Beck’s, Hoegaarden, Lowenbrau and Leffe under license. Following the completion of the deal, StarBev will become a separate business unit of Molson Coors and will be headquartered in the Czech Republic.
The acquisition is expected to enhance Molson Coors’ portfolio with premium brands of StarBev and accelerate its expansion in the emerging markets of Czech Republic, Hungary, Romania and Bulgaria over the long-term. Though the European debt crisis has weakened StarBev’s business, Molson Coors remains positive that StarBev will improve the beer volumes of Molson Coors, which have been on a decline since the past few years.
The acquisition will also benefit Molson Coors’ earnings in the first year of operation and improve the company’s production efficiencies, procurement and other systems, thereby leading to approximately $50 million of pre-tax operational synergies by 2015.
However, the rating agency Moody’s Investors Services, a unit of Moody’s Corp. (MCO) is not in favor of the deal and has trimmed its ratings by a single notch to “Baa2” from “Baa1.”
According to Moody’s, the acquisition will result in an increase of the company’s leverage as Molson Coors will need to access the capital markets for adequate loan to finance the deal. Molson Coors will therefore need to use its strong cash flows to pay down the debt, instead of repurchasing shares.
Our Recommendation
Molson Coors is shifting focus from the growth markets to the fast-growing emerging markets. The developed markets are saturated and face macroeconomic headwinds like rising unemployment and declining spending, which is therefore attracting these companies towards emerging markets like China, India among others.
The economic outlook of these fast growing nations is at present much better than the developed markets, due to the improving standard of living of the middle class.
We currently have a Neutral recommendation on Molson Coors. The stock has a near term recommendation with a Zacks #3 Rank (a short-term Hold rating).
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