Molson Coors Brewing Co's (TAP.N) 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 (2502.T), an early front-runner that was unwilling to pay CVC Capital Partners CVC.UL 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 markets.
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 (ABI.BR) before that, analysts questioned how much savings Molson can generate.
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 (UBBW.NS) to Dutch brewer Heineken NV (HEIN.AS), while Heineken is also in a $1.5 billion race with AB InBev to buy the biggest brewer in the Dominican Republic.
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 (CARLb.CO), SABMiller SAB.L and Heineken.
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 advised StarBev.
Molson Coors shares were down $2.37, or 5.2 percent, at $43.29 in late afternoon trading on the New York Stock Exchange.
($1 = 0.7518 euros)
(Reporting by Martinne Geller in New York and David Jones in London; Additional reporting by Victoria Howley in London and Arpita Mukherjee in Bangalore; Editing by Saumyadeb Chakrabarty, Mark Potter, John Wallace and Gunna Dickson)