Fitch: Potential Implications for Molson Coors of ABI/SAB Deal

CHICAGO--()--Anheuser-Busch InBev NV/SA's announced intention of a bid proposal for SAB Miller plc could have further implications for other companies within the alcohol sector including Molson Coors, according to Fitch Ratings. Fitch views further consolidation within the beer industry as beneficial to drive additional cost efficiencies considering the difficult and soft global operating environment.

Given the substantial size and market concentration in certain markets, the combined ABI/SABMiller would likely be subject to regulatory divestitures in the U.S. and China. Based on valuation multiples seen for other assets, Fitch has estimated the potential value of asset divestitures in excess of $15 billion including approximately $9 billion for SABMiller's 58% ownership position in MillerCoors.

Fitch believes Molson Coors ('BBB'/Outlook Stable) would have substantial interest in an once-in-a-lifetime opportunity to acquire the remaining stake in MillerCoors. Currently, Molson Coors remains at a structural disadvantage in the U.S. relative to the greater scale of ABI. The current MillerCoors joint venture (JV) ownership structure limits additional meaningful synergy opportunities in the areas of procurement, supply chain, distribution and back office that results in lower profitability relative to its larger peers. The only clear path for significant synergy opportunity is through full ownership.

In an event of a change of control at SABMiller, Molson Coors has the right based on the JV operating agreement to increase its stake to 50% from its current 42%. If SABMiller elected to sell or was required to sell by regulators its remaining 50% interest in MillerCoors, Molson Coors has the right of first refusal and right of last refusal.

Molson Coors has experienced declines with beer volumes in the company's key markets of the U.S., Canada and Europe. The volume declines are driven by competitive pressures including the shift in consumer preferences, lackluster economic conditions, termination of certain JVs, and weak consumer spending.

The demand for mainstream lager beer in the U.S., despite the economic recovery, has remained under pressure as the millennial generation shifts preferences into spirits and wine. The ability to realize the above synergies would improve Molson Coors ability to continue investing behind its brands over the longer term while increasing cash generation.

If this opportunity comes to fruition, Fitch believes Molson Coors will do what is right for shareholders. The company has indicated that remaining investment grade is philosophically important and provides tangible benefits. However, in the event of a transformational opportunity, Fitch does not expect it to be a complete line in the sand. The acquisition of the remaining 58% stake represents Fitch's stress scenario case for Molson Coors and could result in pro forma leverage in the low 5x range. As such, Fitch believes that a possible acquisition could result in at least a one notch downgrade to low investment grade depending on funding mix.

The downside risk is balanced by the increased economy of scale with the large, stable and predictable cash flow of the enlarged entity. Therefore, whether Molson Coors remains investment grade would depend on multiple considerations including purchase price for the acquired asset, funding sources, execution risk, commitment to the investment grade rating and ability to delever following the acquisition.

Additional information is available at 'www.fitchratings.com'.

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Contacts

Fitch Ratings
Primary Analyst
Bill Densmore
Senior Director
+1-312-368-3125
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Carla Norfleet Taylor, CFA
Director
+1-312-368-3195
or
Media Relations
Alyssa Castelli, New York, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Bill Densmore
Senior Director
+1-312-368-3125
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Carla Norfleet Taylor, CFA
Director
+1-312-368-3195
or
Media Relations
Alyssa Castelli, New York, +1 212-908-0540
alyssa.castelli@fitchratings.com