MillerCoors will be nothing more than a thorn in the crown of the King of Beers. With their plan to combine their U.S. operations, SABMiller PLC ( SBMRY) and MolsonCoors Brewing ( TAP) can lay claim to 30% of the U.S. beer market and enjoy $500 million in annual cost savings. Anheuser-Busch ( BUD), which dominates domestic brewing with 50% market share, will face a larger competitor on its home turf, but consolidation in this struggling industry can help firm up the pricing environment and benefit all three brewers. Morningstar analyst Matthew Reilly says the merger amounts to an acknowledgment from the makers of Miller Lite and Coors that they're struggling in a low-growth environment as craft brewers and makers of wine and spirits gulp down their market share. "The half-billion in annual savings that these companies say they can get from this deal is very real -- you can see exactly where those cuts will come from," says Reilly. "So, this deal is primarily about cutting costs and achieving a more rational pricing environment than it is about stealing market share from Anheuser-Busch, which will be very tough to do." Finding new avenues of growth in an age when beer is losing its luster with consumers is a major challenge for Anheuser-Busch and a drag on its stock price, but maintaining its market share against its major U.S. brewing counterparts has not been much of a problem. The Budweiser maker's massive scale allows it to demand exclusivity from about 60% of its distributors, while SABMiller and MolsonCoors have less than 10% of their volume distributed exclusively.
Those dynamics could shift with the two smaller players in the market under one roof, but it's unlikely to change much while the industry as a whole is struggling. "This transaction is driven by the profound changes in the U.S. alcohol beverage industry that are confronting both of our companies with new challenges," Pete Coors, vice chairman of Molson Coors, said in a press release. "Creating a stronger U.S. brewer will help us meet these challenges, compete more effectively and provide U.S. consumers with more choice, greater product availability and increased innovation." The combined company will have annual revenue of $6.6 billion and annual sales of 69 million barrels. The brewers said SABMiller will own 58% of the joint venture, MillerCoors, which will operate in the U.S. and Puerto Rico but not Molson Coors' stronghold market of Canada. While Molson Coors will own just 42% of the venture, the sides will share equal voting power. The estimated $500 million in annual savings resulting from the deal will come from optimization of production over the existing brewery network, reduced shipping distances, economies of scale in brewery operations and the elimination of duplication in corporate and marketing services. Meanwhile, transforming the U.S. beer market into a duopoly could stabilize the pricing environment, which has been a drag on profitability for all U.S. brewers in recent years as price increases have slowed while materials costs have climbed. That's great news for investors, if not for beer drinkers.
"The combination of Coors and Miller creates a more rational and stronger No. 2 player in the U.S. market, especially for the pricing environment," said Citigroup analyst Bonnie Herzog in a note to clients. "As a result, we anticipate that this transaction should be more neutral for Anheuser-Busch and could accelerate
its eventual combination with InBev." InBev NV S.A., a Belgian company that is the world's largest brewer by volume, imports a number of beers into the U.S., like Beck's and Stella Artois. It's long been rumored to be a merger partner for Anheuser-Busch. Shares of Anheuser-Busch recently were down 75 cents, or 1.4%, to $51.28, while shares of MolsonCoors were up $4.31, or 8.5%, to $55.14. Anheuser-Busch, a holding of Warren Buffett's Berkshire Hathaway ( BRK.A), has suffered from slow growth in recent years, but it's a cash-generating machine and the company is making investments in overseas markets in an effort to find growth abroad. The company owns a 51% stake in the Mexico-based brewer, Grupo Modelo, as well as a 27% stake Tsingtao, the Chinese brewing giant. "They've been very shrewd about making investments in China and other growth markets, and over time, you'll see Anheuser-Busch find more growth outlets in new products and the like," says Reilly. "The stock won't be a rocket, but overtime, it should generate attractive returns."