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Updated to reflect Goldman Sachs, Fitch comments and analyst estimates
NEW YORK (
Molson Coors'(TAP - Get Report) $3.5 billion push into heavy-drinking emerging economies may come up light on beer growth.
To combat declining sales in key U.S. and Canadian beer markets and falling profits, the maker of Coors Light and Molson announced a foray into recovering eastern European markets with the acquisition of Czech Republic-based
StarBev, the brewer of Staropramen beer.
But the U.S.-Canadian beer conglomerate may be targeting the wrong emerging economy.
A closer look at Molson Coors' acquisition and its strategy of counting eastern Europe as a growth market casts doubt on whether the struggling beer company put its cash and balance sheet to work in the most effective way for shareholders.
"We are not as constructive as management is on the deal as we believe TAP is a more attractive story when deploying capital back to shareholders and focusing on an improving U.S. market," JPMorgan analyst John Faucher wrote in a note Tuesday.
Going into this year, Molson Coors shares were recovering from a big 2011 slide as the company launched its first post-crisis share buyback program in September and added to it at the end of the year. The Denver-based company also raised its quarterly dividend from 28 cents to 32 cents in June. Tuesday's deal could halt Molson Coors' share momentum, as the company is bottling up the buyback program in favor of funding the acquisition.
In late Wednesday trading, Molson Coors fell nearly 3% to $41.98, adding to an over 5% Tuesday stock drop on the deal announcement. The drop puts Molson Coors shares in the red for 2012, adding to its stock underperformance compared with beer giants like
SABMiller and even the
Boston Beer Co.(SAM - Get Report), popularly known as Sam Adams.
For Molson Coors, the acquisition may be light on revenue growth opportunities, and even management said that cost savings will be minimal, at best. Previously, StarBev was owned by private equity firm
CVC Capital Partners in a multiyear investment that produced cost cuts and improving margins.
Through the deal, Molson Coors can claim access to faster-growing economies than the U.S., Canada and Great Britain, where the company generates the bulk of its sales. The economic outlook in StarBev's key markets like the Czech Republic, Serbia, Croatia, Slovakia and Hungary also anticipates faster growth than the Eurozone, but beer consumption may not track GDP growth. Already StarBev's markets have an established beer drinking tradition compared with Asia and Latin America.
Put another way, just how much bigger can the Czech beer gut get?
If you thought the U.S., Canada and Great Britain could cut back on suds, consider that in StarBev's home market, the Czech Republic, the average person drinks 144 liters of beer in a year, roughly double the drinking in North America and the U.K., according to
Euromonitor. In 2010 and 2011, beer consumption in the Czech Republic, Hungary and Serbia fell, while Croatia posted a moderate 1.3% increase.
"While we believe StarBev's brands have grown in the
low- to middle-single digit
range in the past few years, per-capita consumption in several countries where StarBev operates is already very high," wrote Faucher of JPMorgan.
Goldman Sachs analysts say that the deal could add between 2% to 6% to Molson Coors earnings per share in coming years, on GDP-like sales growth and tax efficiencies. Still risks remain, even as the company enters beer markets that can outpace stagnation in North America and the U.K. "
growth potential in these markets will likely be dependent on slightly faster macro-economic growth prospects and TAP's ability to gain share through innovations and introducing more premium offerings," wrote Judy Hong in a Tuesday note maintaining a $46 price target and a "neutral" rating.