Molson Tries to Lose Its Gut as Labatt Gets Lean

The older company is reportedly shedding some nonbrew divisions in order to hang on to a narrow advantage over its younger rival.
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VANCOUVER -- The hot spell that has scorched eastern Canada this summer hasn't been a hit with solely cottage country vacationers and the bucket-and-spade brigade. The nation's major brewers are also living large under the northern sun, thanks to a strong season of suds-swilling.

Canadians, who take their brew almost as seriously as

Bob and Doug McKenzie, are loath to let warm-weather beer-drinking opportunities pass. And this particular season, they're being treated to a slew of extra goodies with their hops 'n barley, thanks to a promotional war that has erupted between the country's longest-standing beer rivals.

Montreal-based

Molson

and Toronto-based

Labatt Brewing

have been duking it out since May, as both companies vie to become the dominant player on Canada's beery landscape.

Each company currently lays claim to about 45% of total beer sales in Canada, although Molson enjoys a slight advantage in the important battleground of Ontario, the country's most populous province.

Still, the 213-year-old Molson, shares of which trade on the

Toronto Stock Exchange

, has watched its market share drop over the years. Ever-aggressive Labatt, owned by Belgium's

Interbrew

, claims it has closed a 13 percentage-point share gap with Molson over the past decade and is now ready to break away as reigning champ. Labatt's recent

Stanley Cup

promotion, in which miniature cups were offered inside cases of its flagship beer

Blue

, was not only a huge hit with drinkers but a symbolic victory for the brewer as well. Molson officials have referred to the giveaways, which also include T-shirts and ball caps, as "trash and trinkets," but industry watchers are giving Labatt their nod of approval.

But like a tipsy local in a Moosejaw watering hole, Molson is refusing to back down from this challenge. While going toe-to-toe with the Labatt enemy, it's also on a mission to breathe new life back into its stock.

The brewer is in the final stages of cutting the fat from its once far-flung empire. Shareholders have long been restless since management started diversifying outside of the brew business, but recent restructuring indicates that Molson is getting back to its bread and butter: beer. On the selling block is its

Beaver Lumber

division, as well as units from its sports and entertainment business, which include

Molstar TV Productions

, a 50% interest in

Universal Concerts Canada

and a 20% holding in the

CTV Sportsnet

channel.

The company's marquee asset, however, the

Montreal Canadiens

hockey franchise, is not for sale. The Habs, which play at the $C250 million Molson Center, are the crown jewel of Canadian sports.

In recent times, though, the fabled hockey club has been a drag on Molson's sports and entertainment division. This year, the club failed to qualify for the

National Hockey League

playoffs, only the third time in 30 years it's missed postseason action. Playing hooky from the playoffs contributed to the division's operating loss of $C3.7 million for the quarter ended June 30, compared with an operating profit of $C3.4 million a year earlier. To help fix the problem, Molson has called in the big boys from New York,

Morgan Stanley

. No one knows for sure how well the investment bankers skate.

At the same time, Molson is taking dead aim at the U.S. beer market. The company is talking with

Miller Brewing

about developing the Molson trademark south of the border, and taking control over marketing. Miller owns 50.1% of

Molson USA

, the company's stateside distribution arm. Molson and Australia's

Foster's Brewing Group

each own just under 25% of the division.

"The U.S. imported beer market enjoys double-digit growth and is a top priority," said James Arnett, Molson's chief executive, in a press conference after the June annual meeting.

But despite the ongoing struggle with Labatt, the woes of

les Canadiens

and the pressing need for greater sales south of the 49th parallel, investors are warming up to Molson's newfound focus. The turnaround appears to be in full swing, as the company reported operating profits for the quarter ended June 30 of $C88 million, nearly doubling last year's figure. Investors, meanwhile, have bid up Molson's shares from a mid-April price of $C19.85 to their current value in the $C27 range.

Still, the beer titan's leaders don't have time to drink and be merry. Canada's oldest brewery is still engaged in the fight of its life -- and summer isn't even over yet.

Derek Moscato, a financial journalist in Vancouver, follows Internet investment culture as an editor/writer at Stockscape.com.