* Molson Coors beats Asahi to East European brewer
* Deal to lift EPS 1st yr, boost sales in developing markets
* Analysts question returns
* Shares down 3.7 pct
By Martinne Geller and David Jones
April 3 Molson Coors Brewing Co's plan
to buy East European brewer StarBev for 2.65 billion euros ($3.5
billion) will give it more exposure in developing markets, but
the brewer may have been better off trying to improve its
business in developed markets, analysts said.
Molson Coors, maker of Carling, Blue Moon and Coors Light
beers, outbid Japan's Asahi Group, an early
front-runner that was unwilling to pay CVC Capital Partners
more than $3 billion for StarBev, the maker of Czech
beer Staropramen, according to people close to the deal.
Molson shares fell more than 5 percent on Tuesday as
analysts questioned the returns on Molson's investment and saw
the deal as not addressing its core challenge of growth in North
America, where lingering unemployment and a greater consumer
interest in cocktails and wine has curbed demand for beer.
"While we believe gaining exposure to emerging markets is
positive, we don't anticipate much synergy potential in the
acquisition," said UBS analyst Kaumil Gajrawala. "Ultimately,
the key to creating shareholder value is to grow in the U.S."
Molson Chief Financial Officer Stewart Glendinning said the
deal will help lift the percentage of revenue from outside
Canada, the United States and Britain to the mid-teens from the
low single digits, giving the company "a more attractive growth
profile and more balanced sources of earnings and cash."
Still, analysts were not that impressed.
"We believe (Molson) is a more attractive story when
deploying capital back to shareholders and focusing on an
improving U.S. market," said J.P. Morgan analyst John Faucher.
Last month, Molson reported its first better-than-expected
quarterly profit in five quarters, after price increases and
cost cutting helped offset the weak sales that in previous
quarters led to profit-sapping promotions.
StarBev should add to earnings in the first full year of
ownership and give Molson its first big business in emerging
StarBev operates in the Czech Republic, Serbia, Croatia,
Romania, Bulgaria, Hungary, Montenegro, Bosnia-Herzegovina and
Slovakia -- markets Molson sees as easier to navigate than
places like India and China.
Molson has exposure to India and China through joint
ventures but has been reluctant to make large acquisitions,
saying it is still learning how to operate there.
Given that StarBev has been owned by private equity since
2009, and Anheuser-Busch InBev before that, analysts
questioned how much savings Molson can generate.
<For a Breakingviews column on the deal, see
CREATING VALUE AMID CONSOLIDATION
Despite the impact of operating in some weakened economies,
StarBev was seen as one of the last attractive buys in a rapidly
consolidating beer industry where other deals are still brewing.
Indian tycoon Vijay Mallya is weighing the sale of all or
part of his stake in United Breweries to Dutch brewer
Heineken NV, while Heineken is also in a $1.5 billion
race with AB InBev to buy the biggest brewer in the Dominican
Molson's purchase is valued at around 11 times StarBev's
core 2011 profit, or EBITDA, of 241 million euros, from annual
sales of 700 million euros.
That is "well within the range of recent transactions,"
according to Molson's Glendinning, but some analysts thought the
price was high.
"We did not think the business in many fragmented markets
was worth more than 10 times EBITDA, or some $3 billion, so this
has to be seen as a high price," said one analyst, who does not
cover Molson Coors and, therefore, did not want to be named.
Molson sees synergies of $50 million a year by 2015, with
most of that coming from cutting costs in areas like procurement
and production and the rest from being able to sell Molson's
beers in those countries.
StarBev also distributes some AB InBev beers, including
Stella Artois and Hoegaarden. Molson said that agreement should
not be impacted by a change in control.
Molson is financing its purchase with $3 billion of cash and
debt and an additional 500 million euros ($667 million) in
convertible debt issued to the seller.
Moody's Investors Service lowered its ratings of Molson
Coors subsidiaries, saying it expects leverage to rise.
Moody's analyst Linda Montag said she expects Molson to face
challenges navigating a collection of markets that vary widely
in terms of beer consumption and size of their middle class.
Molson will also go up against tough competitors in the
region, including Carlsberg, SABMiller and
Molson remains committed to its investment-grade rating and
said it will suspend share buybacks until it pays down its debt.
Private equity firm CVC bought StarBev in December 2009 from
AB InBev, which was cutting debt after the $52 billion purchase
of Anheuser Busch. The world's biggest brewer had the "right of
first offer" to repurchase StarBev, but showed little interest.
Morgan Stanley was the lead financial adviser to Molson
Coors, with Barclays and Deutsche Bank as co-advisors. Nomura
Molson Coors shares were down $2.37, or 5.2 percent, at
$43.29 in late afternoon trading on the New York Stock Exchange.