Molson: Expensive Acquisition Keeps Investors Away

| About: Molson Coors (TAP)

Shares of Molson Coors Brewing Company (TAP) fell 5.5% in Tuesday's session after the brewer made a deal to acquire StarBev for $3.5 billion from private equity firm CVC Capital Partners.

The deal

Under the deal Molson will pay a some $3.55 billion for StarBev which is owned by private equity firm CVC Capital. Molson will pay a little less than $3 billion in cash for the company and assume $667 million in convertible debt. Molson already has committed financing in place.

Both parties hope to complete the transaction in the second quarter of this year although this is subject to objections of European competition authorities.

Molson pushed itself into a foreign deal. Revenue growth have been slowing in mature markets such as the US and Canada on which the company focuses. The brewer has no exposure to faster growing beer markets.
Starbev, although also hit by the European debt crisis, still has plenty of opportunities in Central and Eastern Europe where demand is still growing. "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," according to CEO Swinburn.

CVC Capital is the clear winner in this deal. As recent as 2009 it bought StarBev from Anheuser-Busch for some $3 billion. CVC was looking for an exit, shopped around, and found Molson willing to pay a premium price after a bunch of competitors showed no real interest.

Expensive deal
Analysts point out that a deal is rather expensive. Molson expects a "mere" $50 million in pre-tax cost synergies, which is logical as it is not yet present in Europe. Its main competitor in the bid for StarBev, Asahi from Japan, was reportedly only willing to pay $3 billion for the company. Despite the price tag, the company expects the acquisition to be additive to 2012's earnings.

Analysts point out that the deal values StarBev at 11 times EBITDA of $241 million Euro and 3.5 times its annual sales of Euro 700 million. Furthermore the business is fragmented in terms of brands and geographical regions.

The market is not happy with Molson's announcement. After Tuesday's 5% drop the company has a market value of $7.8 billion, indicating that some $400 million has gone up in thin air. This amount represents the premium Molson is willing to pay over Asahi's bid of $3 billion.

Molson has a cash balance of $1.1 billion and has a debt position of $1.9 billion, leaving it with a mere $800 million net debt position, before the announcement. At Tuesday's closing price shares are valued at a mere 2.2 times annual revenues and 11.5 times net earnings. Although the North American businesses will have a much slower growth profile compared to StarBev, the valuation differences are large.

Investment thesis
Molson got what it wanted. It bought growth, at a price. Analysts and investors are not happy about it as the acquisition is quite expensive and its new assets are scattered across countries and across brands.
Investors would have preferred operational focus on the North American operations and would have applauded a buyback or a significant dividend increase, from its current yield of 3%, instead of this acquisition.

I stay away for now as management has caused a serious dent in investors trust.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.