Chalk-up another bad deal for Molson

Here's a new idea for a college drinking game. Every time the Molson family enters into a boneheaded deal involving the future of the brewing company that bears its name, everyone downs a bottle of its beer. OK, so the participants won't get soused, but it means that every few years, they will drink Molson beer. With the news Monday of a deal to join the U.S. operations of Molson Coors Brewing Co. and SABMiller plc, it's time for another round.

The track record goes back to Molson Inc.'s 1993 deal to sell 60% of its brewery to Miller and Fosters Brewing, which it took years to buy back when it became evident the partners' interests were at odds. Molson bought Brazil's second largest brewer in 2002 ignorant of the market and what it was buying. The value of its investment fizzled.

Then Molson did a 'merger of equals" with Adolph Coors. Rather than sell control at a sufficient premium (Coors later paid a $5.44/share dividend to Molson investors to win the deal), Molson fused with a weak No. 3 player in the U.S. that owned a declining operation in the U.K. Head office moved to Denver, the firm became U.S.-registered and the stock trades mostly in New York. Some merger of equals.

The strategy when the Molson Coors deal closed in February, 2005, was to create a continental brewer that would achieve big synergies and push the Coors Light brand. Its sales have grown here at the expense of Molson brands, but the firm still the same 11% market share in the U.S. it had back then. Canada brews 20% of the beer but accounts for 63% of pre-tax income net of head office costs.

Sure, Molson Coors shares as of last Friday were up 38% since the deal closed, but Molson investors would have long ago booked and reinvested the gains had a proper auction taken place for the firm.  Of course, everyone knows why that deal happened: Eric Molson and Pete Coors, chairmen of the two family-controlled firms, didn't want to sell their heritage, but chose to remain players in the global beer business, even if the deal did more to stroke their egos than reward investors.

Hence, Monday's folly of a deal, which will go through, as the families control the votes. There is much to recommend a combined Miller/Coors business. The entity would have 31% market share and achieve US $500-million in annual savings. That's fine. It's the structure of the deal that stinks. Molson Coors gets a 42% stake in the joint venture, five out of 10 board seats and 50% voting interest in the JV. But after Molson Coors CEO Leo Kiely -- who takes that job with MillerCoors -- leaves after two years, SABMiller gets to appoint the CEO. If there's a dispute over the choice, SABMiller gets the deciding vote. That means it controls the agenda, and presumably, which brands (anyone say Miller time?) get the most love.

So: SABMiller is effectively buying control of Molson Coors' U.S. business. Once again, the seller has asked for no premium (Miller even gets final say if Coors tries to sell its stake in the operation, handcuffing further M&A opportunities). When Mr. Kiely is gone and the SABMiller-picked CEO is in place, Molson Coors becomes a passive, minority shareholder in the asset that now accounts for most of its volume.

With two sets of owners, the Canadian and U.S. units more than ever look like different businesses, throwing into question the logic of the original deal to create a global giant.

As one U.S. fund manager put it, Molson Coors will be "like a not-very-good mutual fund for brewing stocks." Though the stock rose Tuesday, a holding company discount should eventually creep in.  The Molson and Coors families have done another deal that keeps their names on the doorplates and seats in the boardroom -- dignity and shareholder value be damned.  I am not sure if they are cursed or just cursed at making lots of bad decisions but the future of this company is certainly in question.

By: Financial Post