Molson Coors (TAP) Chugs Down StarBev for $3.54 Billion

Denver-based brewer Molson Coors (TAP: Charts, News) made a surprising contrarian investment this week, spending $3.54 billion to acquire Eastern European brewer StarBev and its nine breweries located across central and eastern Europe. Molson Coors outbid Japan's Asahi, which offered $3 billion for the brewer.

Molson Coors will pay $3 billion in cash and the rest in convertible debt. Analysts noted that the premium was high, valued at 11 times StarBev's 2011 EBITDA of 241 million euros. Molson Coors CEO Peter Swinburn stressed that the strategic importance was worth the hefty acquisition premium. Swinburn stated, "The acquisition of StarBev fits squarely into Molson Coors' strategy to increase our portfolio of premium brands and deepen our reach into growth markets around the world."

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StarBev, the parent company of Bergenbier, Ozusko and Borsodi, is also the local distributor of international brands Stella Artois, Beck's, Hoegaarden, Lowenbrau and Leffe. The company, which generated $1 billion in revenue last year, employs 4,100 workers in the Czech Republic, Serbia, Croatia, Romania, Bulgaria, Hungary and Montenegro. The acquisition of StarBev would allow Molson Coors to seamlessly export its own brands, such as Carling, Miller, Coors and Molson, to European drinkers. Through the addition of StarBev's facilities, Molson Coors would increase its annual production from approximately 40 million barrels to over 50 million.

StarBev will remain a separate division of Molson Coors, retaining its headquarters in the Czech Republic. The deal is expected to close in the second quarter, and is forecast to become earnings accretive within its first full year of operations. By 2015, Molson Coors expects the acquisition synergies to save $50 million in pre-tax operational savings.

Molson Coors' big European bet comes at a time when uncertainty is keeping most foreign investors away from the troubled continent. Unemployment across the European Union has now hit a 13-year high with few signs of relief. The sovereign debt crisis remains largely unresolved. However, Molson Coors is looking at Eastern Europe as a long-term investment opportunity. Swinburn was optimistic regarding the region's recovery efforts. "The central and eastern European beer market is attractive," he stated, "with strong historical trends and upside potential as the region returns to its pre-economic-crisis growth rates."

Eastern Europe isn't the only international region that Molson Coors is focusing on. Last June, the company invested $35 million in a joint venture with Cobra India to brew, market and distribute Cobra beer throughout India and South Asia. This complements Molson Coors' $40 million joint venture with the Hebei Si'hai Beer Company in China, signed in June 2010. Both agreements give Molson Coors total control over local brewing and distribution operations, allowing the import and export of its various brands. Prior to the economic crisis, Molson Coors had been confined to the mature markets of the United States, Canada and Britain, but is now following the lead of other large American corporations by diversifying into high-growth emerging markets.

Molson Coors has been in the middle of a strong turnaround, posting stronger-than-expected sales in its fourth quarter with a 35% surge in earnings. This was a massive improvement over its weak third quarter, when beer sales slid sharply due to decreased discretionary spending. The decreased sales volume led to aggressive discounts to drive sales, which in turn shrunk margins. That was the final quarter of weakness in a vicious cycle that started during the global financial crises of 2008-2009. Since the nadir of the crisis, shares have slowly but steadily climbed 43%, as the American economy and discretionary spending have firmed up. Shares of Molson Coors are fundamentally cheap, trading at 10.5 times forward earnings with a 5-year PEG ratio of 1.7, and are likely to be seen as a safe defensive stock if market volatility increases.

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Published on Apr 5, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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