Mega beer deal offers Molson Coors a bigger swig of U.S. market

By Anjali Athavaley and Lauren Hirsch

NEW YORK (Reuters) - A deal between the world's two biggest brewers gives smaller rival Molson Coors Brewing Co a rare chance to bulk up in the United States, provided it can come up with the cash, according to industry bankers and analysts.

Anheuser-Busch InBev and SABMiller PLC agreed on Tuesday to create a company making almost a third of the world's beer, bringing together such brands as AB InBev's Budweiser and Corona with SABMiller's Peroni and Grolsch.

To win over regulators, the combination would almost certainly have to exit from SABMiller's U.S. business, which it operates through a joint venture with Molson Coors.

Molson Coors is widely expected to make a bid for SABMiller's 58 percent stake in their jointly owned MillerCoors, known for such brands as Coors Light, Miller Lite and Blue Moon. Their venture agreement gives Molson Coors the right to name new management in a the event of a change in control and the right to make the first and last bid for the remaining stake, both of which could deter other potential bidders.

Full ownership of the joint venture would give Molson an opportunity to cut costs by streamlining back office functions such as legal and finance, as well as build scale procurement and supply chain, analysts say.

Taking over SABMiller's stake would give Molson a U.S. market share of close to 28 percent, based on 2014 data from Euromonitor International. Nomura analysts predicted a 28 percent increase in Miller Coors earnings per share. Assuming the SABMiller acquisition gets done, Molson Coors is the “ultimate buyer” of the U.S. operations, said Morningstar analyst Adam Fleck. He estimates SABMiller's 58 percent stake would cost Molson Coors $9 billion to $10 billion, based on the valuation model of about 9 times earnings before interest, taxes, depreciation and amortisation (EBITDA). AB InBev used it when it sold off Grupo Modelo’s U.S. beer business.

Other analysts and industry bankers have said the MillerCoors stake could be worth anywhere from $8 billion to $11 billion.

The catch, however, is that Molson's own market capitalisation was about $16 billion as of Tuesday, and the company had $3.1 billion in debt on its balance sheet as of June 30, raising questions over how it could fund a deal.

One option is leverage, with Molson Coors using the free cash flow from MillerCoors to pay down debt quickly. Molson Coors could partner with another entity to buy SABMiller's stake, or use a rights issue to finance it, industry bankers said. Molson Coors shares rose 10 percent to $86.58 on Tuesday after AB InBev and SABMiller announced their deal, showing that investors are supportive of the company making a bigger bet on MillerCoors, they said.

"You could lever up the entire enterprise to slot in the extra 58 percent," Fleck said. "You'd be fully consolidating that EBITDA, which would make it more palatable from a leverage perspective."

A Molson Coors spokesman said the company was watching recent events with interest but declined to comment on prospects for MillerCoors. Based on the joint venture terms, AB InBev cannot reach out to Molson Coors until it has submitted a formal offer, which is due on Oct. 28 under UK takeover rules.

For Molson Coors, more exposure to the U.S. market would be hard to turn down. While beer volumes have been under pressure from consumers buying more spirits, as well as Mexican imports and craft beer, the United States remains "the biggest beer profit pool of the developed markets around the world," said Vivien Azer, an analyst at Cowen & Co. "They surely can afford it," she said of Molson Coors. "The company has done a good job of delivering on their balance sheet."

(Reporting by Anjali Athavaley and Lauren Hirsch in New York, additional reporting by Martinne Geller in London; Editing by Michele Gershberg and Steve Orlofsky)