SABMiller and Molson Coors to combine US operations

(Adds company comments, background, changes dateline, previous LONDON)

LONDON/NEW YORK, Oct 9 (Reuters) - Brewers SABMiller SAB.L and Molson Coors Brewing TAP.N have agreed to combine their U.S. operations to create a business that will have annual sales of $6.6 billion and be the second-biggest market player behind Anheuser-Busch BUD.N.

The venture, MillerCoors, will generate around $500 million of annual cost savings by the third year after completion of the deal, which is subject to the approval of the U.S. competition authorities, the two groups said on Tuesday.

“We are confident of clearance. We believe this is a pro-competitive transaction,” Molson Coors Chief Executive Leo Kiely, who will become chief executive of the venture, told a news briefing after the deal was announced.

The deal brings together the second-largest U.S. brewer with beer brands such as Miller Lite, Miller Genuine Draft and Milwaukee’s Best and the third-largest, Molson Coors, which brews Coors Light, Molson Canadian and Molson Dry beers.

Citi analyst Bonnie Herzog said the deal will transform the U.S. beer market into a duopoly, be positive for Molson Coors, and could accelerate Anheuser-Busch's eventual combination with the world's biggest brewer, Belgium-based InBev INTB.BR.

SABMiller chief executive Graham Mackay said the venture would have almost a 30 percent share of the U.S. beer market, adding SABMiller’s 19 percent share to Molson Coors’ 11 percent, whereas Budweiser-brewer Anheuser-Busch has 50 percent.

The venture’s strength’s will be its large portfolio of higher-end beers, with Miller Chill, Peroni Nastro Azzurro and Blue Moon Belgian White, as well as its geographic span. Miller’s stronghold is in the central part of the United States, while Coors’ is strong in the West and key parts of the Northeast.

Mackay said the “high” synergies of $500 million from the deal will come from savings made largely in distribution and sales, while there will be no closures among SABMiller’s six U.S. breweries and Molson Coors’ two in the country. But in order to achieve those savings, the companies will incur costs of $400 million to $450 million over two years.

The companies, which have been talking to each other for around a year, said final agreement for the deal is expected by the end of 2007, while analysts added that regulatory approval is expected about six to nine months after that date.

SABMiller shares closed up 1.4 percent at 14.97 pounds in London, while Molson Coors’ shares were up 10 percent at $55.92 in late afternoon trade on the New York Stock Exchange.

Anheuser-Busch shares closed down 46 cents at $51.57 on the New York Stock Exchange.

Analysts said the No. 1 brewer, which has been losing market share this year, will now face a more able competitor with significant funds to invest in marketing.

Molson Coors Vice Chairman Pete Coors will be chairman of the joint venture, while Mackay will become vice chairman. Miller Chief Executive Tom Long becomes president and chief commercial officer while Kiely will be chief executive for two years, to be succeeded by an executive nominated from Miller.

“Tom Long sits in a very critical position,” Kiely said, adding in response to a question that he would be ready to pass the baton to Long as soon as the integration and transition have been completed.

Analysts see a high likelihood of the deal going through as the Molson and Coors families, which control Molson Coors, support the deal, and as a precedent was set from a regulatory standpoint by the creation of Reynolds American RAI.N.

Reynolds American brought together the second- and third-largest U.S. cigarette companies in 2004 to compete against Marlboro-maker Altria MO.N.

“We expect this approval to be forthcoming ... The combination will create a strong number-two player in the U.S. beer market with 30 percent market share,” said analyst Matthew Webb at Cazenove.

Each brewer will have a 50 percent voting interest in the joint venture, with SABMiller having a 58 percent economic interest and Molson Coors 42 percent.

There is a break-up fee of $150 million to be paid if one party backs out of the venture, the headquarters of which is yet to be decided.

London-based SABMiller, the world’s second-largest brewer, bought Miller in 2002 but has struggled to make headway in the United States against Anheuser-Busch, especially in its attempts to push up prices, and its market share has slipped below 20 percent.

Canada’s Molson combined with U.S. group Coors in 2005 and despite the success of Coors Light it has also struggled to gain market share. Its other major operations in Canada and Britain are unaffected by the U.S. deal.

((Editing by Quentin Bryar/Greg Mahlich/Toni Reinhold; Reuters Messaging: david.jones.reuters.com@reuters.net; +44 20 7542 7972)) Keywords: SABMILLER MOLSONCOORS/