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Published: April 22, 2010
The beer market is very mature in developed
markets as has been around for hundreds of years. Case in point:
Molson has been in operation since 1786 while Coors was founded
in 1873. Legend has it that beer is as old as civilization
itself, dating back thousands of years and contention as one of
the oldest consumer goods out there. The unusually high level of
mergers and acquisition activity has been one of the few ways
for the major players to keep profit growth chugging along.
When Canadian beer behemoth Molson merged with the third largest
brewer in the United States, the intent was to better compete
with SABMiller and Anheuser Busch, the second-largest and
largest brewers in the United States at the time of the merger.
The result: Beer giant Molson Coors (NYSE: TAP).
Consolidation in the beer industry has been steady since SAB
acquired Miller Brewing Company in 2002 to create one of the
most dominant brewers in the world. To further strengthen its
domestic clout, Molson Coors combined forces with SABMiller to
create MillerCoors, a joint venture in the United States. Not to
be outdone, Anheuser merged with Belgian-Brazilian behemoth
InBev in late 2008 to create Anheuser-Busch InBev (NYSE: BUD).
Acquisitions can allow for entry into new markets, increased
production scale, clout over suppliers and other related cost
cutting measures. Molson Coors expects $500 million in total
cost savings from the MillerCoors joint venture and achieved
half of that in 2009 while posting $382 million in operating
income.
Molson Coors is currently the second largest brewer in Canada,
with a 40% market share, slightly behind Labatt's 44% share.
Canada is a highly profitable market but growing about +1%
annually. It is also the second largest brewer in the U.S. with
30% of the market, still well behind A-B InBev's 50% share. The
U.S. market has also been growing about +1% a year, though
growth fell by -2% in 2009 as a recession cut into sales at pubs
and bars.
The United Kingdom represents MolsonCoors' third primary market
where it is the third largest brewer with 19% market share.
Though also highly profitable, industry shipments have been
declining in the low single digits for more than a decade now.
Overall, Canada accounted for nearly half of total company
profits last year, with the U.S. bringing in 40% and the U.K.
about 10% of the total pie.
Despite the slow-growing nature of the beer industry, investors
can do quite well by holding shares of Molson Coors. At a
forward
P/E below 13, the market is not fully appreciating the
company's position as an industry leader with high barriers to
entry. Free cash flow exceeded reported
net income last year and
that is used to support a current
dividend yield in excess of 2%
with the potential for steady share repurchases going forward. A
combination of continued cost cutting at MillerCoors and
improving demand in sympathy with a recovering economy bode well
for the share price going forward.
The final consideration is that Molson Coors is considerably
smaller than its two larger rivals and could be acquired at a
hefty premium to the current valuation. Cash cow businesses are
very appealing and offer plenty of downside protection for
individual investors and strategic acquirers alike. Potential
suitors include European-based Carlsberg or Heineken. Anheuser
Busch was acquired by InBev for close to 23 times earnings, a
+77% premium to where Molson Coors currently trades.
-- Ryan Fuhrmann
Contributor
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