Molson Coors' MillerCoors Acquisition: Key Takeaways

| About: Molson Coors (TAP)

Summary

Molson Coors acquires full ownership of MillerCoors LLC.

Cross border craft beer expansions in the works.

Molson Coors becomes the third largest brewer with latest acquisition.

Following some major shakeups in the brewing sector Molson Coors Brewing Company (NYSE:TAP) has emerged from the dust with sole ownership of the MillerCoors LLC joint venture it co-owned with SABMiller (OTC: SBMRY). The possibility of this acquisition by Molson Coors came to be because of the merger between Anheuser Busch Inbev (NYSE: BUD) and SABMiller. In order to meet competition requirements SABMiller was forced to unload its 58% stake in the MillerCoors LLC joint venture.

For investors of Molson Coors this $12 billion acquisition will double the size of the company and will give the company sole ownership of several brands of beer and the non-U.S. distribution of Miller branded products. Now Molson Coors will be the third largest brewer by enterprise value in the world and will be able to maximize its purchasing power with suppliers. Molson Coors is projected to spend $7 billion in supply purchases per year going forward, compared to the $2 billion it previously spent. Not only will investors see better sales numbers with this larger brewer but the company is projecting $200 million in cost savings over the next four years.

Distribution overhaul

For Molson Coors this new agreement brings with it a plethora of market opportunities and the ability to bring new products to new regions. For instance, some believe that Molson Coors will be able to now introduce brands such as Blue Moon and Coors Light to parts of Africa and South America at a greater rate.

In North America this acquisition opens up the possibility for greater movement of craft beers between Canada and the United States. Already Molson Coors has hinted that brands such as Starpramen, Miller High Life and Fransiscan Well could be coming to Canada over the next year. Going the other way it is believed that Canadian craft brands such as Granville Island (one of my favorites) and Creemore could be making it to the United States by next spring.

This cross border exchange should go a long way to help rejuvenate beer sales in the company. On the Canadian side it will help Molson's craft brewers such as Granville Island find new markets to sell in, as thanks to current provincial regulations the American market is the best possibility for finding new customers.

Tapped out and waiting for a restock

Any source of new markets, increased sales and better operating margins are very important to Molson Coors at the moment as it has just come off of a disappointing quarter. In its last quarterly report Molson Coors saw its net sales (sales minus excise taxes) fall to $986 million from $1 billion, representing a 1.9% decline. Gross profit fell to $424 million from $425 million and net income fell to $172 million ($0.81 per share) from $229 million ($1.23 per share). During the same period the MillerCoors joint venture saw its net sales fall by 3.5% to $2.12 billion, EBITDA fell by 3.3% to $492 million and net income fell by 11.8% to $429.5 million (was impacted by the closure of Eden Brewery).

Molson Coors attaining full ownership of MillerCoors will not solve all of the problems with the current state of the brewing industry which is seeing an overall decline in consumption. However, investors should be able to take advantage of this deal for the next couple of years as new beers arrive in new markets in the spring which should generate additional sales through curiosity alone. Then there is also the anticipated benefit of a more streamlined procurement process which should boost net income. If not for the long haul the first few quarters of unified results should garner some attention from the market.

The main decision day for those looking for a long-term strategy with Molson Coors will come next fall, when we will see the hard numbers on whether or not its cross border craft brew exchange program has had any benefit for the company. I personally believe that for the North American market this is its only available avenue for sales growth. If Molson Coors is able to reduce costs and increase sales some analysts believe that the company will be able to tame its debt and increase its dividend.

Following the announcement, the average price target on the NYSE has risen to $131.00 with a total range of $115.00 to $140.00. It could take some time to reach the upper end of the price target projections, but if the stock is able to reach those levels investors must keep a close eye on how the company performs during the summer of 2017 in order to determine their exit strategy.

Price

52 Week Low

52 Week High

Dividend

Yield

TSX

C$145.00

C$112.51

C$147.85

C$2.14

1.48%

NYSE

$110.60

$80.78

$112.19

$1.64

1.48%

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You may also be interested in other recent articles I have written for Seeking Alpha with my Canadian point of view that focus on stocks and stories that I have found compelling. You can also find my previous articles here for further study.

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