MillerCoors Joint Venture Is Music To Altria Shareholders' Ears

by: Todd Sullivan

The announcement that SAB Miller (OTCPK:SBMRY) and Molson Coors (NYSE:TAP) would combine US operations is music to Altria (NYSE:MO) shareholders ears. The joint venture, now known as MillerCoors is designed to create cost savings in the US, where SAB is the second biggest brewer and Molson the third behind Anheuser Busch (NYSE:BUD).

The combined company will have annual net revenues of approximately $6.6bn and earnings before interest, taxation and depreciation of about $842m. The deal is expected to close by the middle of 2008 and SAB Miller will have a 58% economic interest to Molson Coors' 42% interest. This means that $490 million will go to SAB and with Altria's interest in SAB, 4 to 5 cents a share will flow to Altria's bottom line.

All the numbers are preliminary, of course, and I am thinking on the low side. The cost savings from the deal, currently estimated at $500 million a year, pale when one considers the muscle the combined entity will have now in terms of pricing, placement and promotional activities. One could argue that with the diversity of brands in both the US and Canada, the JV is poised to be able to take advantage of a wider spectrum of event and activities than Anheuser Busch.

While its effect on Altria bottom line at this point is modest, I would look for it to grow significantly in the coming years. I also would not be surprised, once the PMI spin from Altria is complete, to look for Altria to use some of its new founded balance sheet flexibility to attempt to expand its stake on the brewer.