Market Overview

Molson Coors Buys StarBev

It was revealed on Tuesday that Molson Coors Brewing Company (NYSE: TAP) will acquire brewer StarBev from private equity firm CVC Capital Partners for 2.65 billion euros ($3.52 billion), in a bid to expand its business in the central and eastern European markets.

According to the Chicago Tribune, StarBev, the owner of Czech lager Staropramen, will continue to be run as a separate business until the deal is concluded.

"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," Molson Coors' Chief Executive Peter Swinburn said in a statement.

TAP's business is concentrated in the Canadian, British and American markets, though the company expects this deal with StarBev to add to its earnings in the first full year of operations.

CVC bought StarBev in 2009 and put it up for sale after a number of approaches from different brewers. Staropramen is considered a quality product, and it will undoubtedly prove a valuable addition to the TAP business.

On March 7, Morgan Stanley published a research report stating that, in an analyst meeting, TAP focused on how it expects to drive profit growth through topline growth at the meeting given cost savings are dissipating, with a focus on core brands, enhanced innovation (particularly Coors Light Iced T which we think will have a difficult time gaining traction given its beer heritage, as well as Carling Zest and Chrome in the UK).

"TAP is also planning a $30 million step-up in advertising, and a new ad copy on Miller Lite in the US. We remain skeptical around TAP's ability to reinvigorate topline trends, which we detail on pages 3-7, as TAP is struggling with weak beer category growth in its mature markets, market share losses, and beer innovation has historically not been a sustainable volume driver."

On that same day and of the same meeting, Bank of America Merril Lynch said that TAP management indicated that the earnings models will be more dependent on revenue growth going forward. In our view, the timing is right for this change. Since 2005, TAP has generated ~$950m of savings as it made changes to boost efficiency and improve effectiveness in selling and marketing.

"It is reasonable, in our view, for TAP to start addressing more directly the decline in Miller Lite in the U.S. and consumer preferences for wine and spirits in its core markets. While it remains to be seen how long it will take for TAP to effect a rebalancing of its earnings model, we think a more assertive stance on the need for sales growth is right for the business long term."

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