The US-Canadian brewer Molson Coors Brewing Company (TAP) has finally received European regulatory approval to acquire the East European brewer StarBev L.P. from private equity group CVC Capital Partners Limited. The deal was signed in early-April for 2.65 billion euros ($3.54 billion), and is expected to consummate by the end of June 2012.
In addition, Molson Coors had received approval from the regulators in Serbia and Ukraine. The company also completed the debt offering of $1.9 billion in May to finance the acquisition of StarBev. The company expects to use its surplus cash to finance the remaining amount.
StarBev currently operates nine breweries in Central and Eastern Europe and holds the 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.
Our Recommendation
We believe that the acquisition will result in an increase of the company's debt 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.
However, we are encouraged that the company is shifting focus from the growth markets to the fast-growing emerging markets. The developed markets are saturated and are facing macroeconomic headwinds like rising unemployment and declining spending, which are, ultimately 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 standards 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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