Molson Coors Brewing Company
Events: Summary Investment Thesis
October 16, 2015
- NYSE: TAP
- Recent PPS: $87.76 (10/15/15 close)
- Shares Out: 186.1 million
- Market Cap: $16,332
- Net Debt: $2,562
- Enterprise: $18,894
Thanks to Dan Hurley (@ApexHurley), TAP came onto my radar in early 2015 as a potential event-driven investment. I held off taking a position in the high $70’s, as the prospect of an ABI/SAB deal was still too speculative; but unfortunately did not pull the trigger when the stock declined to the high $60’s in August/September. Just dumb. Very dumb. It was a lay-up down there.
ABI/SAB deal speculation heated up in early September; and after talking to ABI (for ABEV purposes, actually) I thought this round of speculation had stronger legs and decided to take a position in TAP on weakness. With the stock down almost 4% on 10/6 I established a position, then increased it by ~33% into further weakness on 10/12.
TAP was sort of a ‘no brainer’ with the benefits of a full MillerCoors consolidation well covered by the ‘Street’, and the event-driven opportunity a relatively simple ‘time arbitrage’; but the deeper I wade into the situation the more compelling I believe the TAP opportunity represents. I am still in the process of conducting a ‘shallow dive’ on the global beer industry, so this short write-up will summarize my initial thoughts on the long-term margin expansion opportunity.
Molson Coors (TAP) has operations in Canada ($2.4B Sales) and Europe ($1.8B), and a 42% economic (50% voting) stake in a JV with SABMiller (SAB) called MillerCoors. Due to ABI’s (Anheuser Busch Inbev) 45% U.S. market share, upon purchase of SAB it must dispose of SAB’s 58% in the MillerCoors JV. Upon a change in control TAP has the right to boost its stake to 50% at a price determined by a consortium of banks, and has the right of first refusal on the remaining 50% – so, TAP is mechanically in fantastic position to take full control of the MillerCoors JV…and likely at a relatively attractive price (10X EBITDA?).
While the MillerCoors JV has done a tremendous job extracting synergies from SAB and TAP’s combined U.S. operations ($1B synergies v. $500MM originally estimated), JV’s are inherently inefficient, particularly at the corporate/incentive levels. Upon full consolidation, TAP would likely put the pedal to the floor on extracting ABI-like efficiencies from MillerCoors. The ‘Street’ seems to land between $400 to $500 million of synergies, but I believe the opportunity is likely (far?) higher…
My ‘shallow dive’ into the synergy opportunity is focused on disproving the following line of thinking:
- In 2006, Anheuser Busch’s EBITDAM was 30% on ~49% market share
- Conservatively, ABI added approximately 10% to AB’s EBITDAM
- MillerCoors’ 2014 EBITDAM was 21.1% on market share of ~27%
- The 8.9% gap between AB’s 2006 EBITDAM and MillerCoor’s 2014 EBITDAM is ‘structural’ due to the difference in market share
- The additional 10% margin extraction by ABI remains ‘up for grabs’ by not only taking full control of the JV, but combining it with TAP Canada to create “TAP North America”
TAP North America generated sales of $10.2B in 2014; and assuming it can capture 75% of the 10% ‘ABI margin expansion’ opportunity, synergy potential is approximately $766MM. On 2014 sales, this implies a pro forma EBITDAM of 30% for TAP North America…well below ABI’s North America EBITDAM of ~43%.
TAP Europe. There is talk that ABI could use the international rights to Miller/Coors brands to negotiate a higher price for the 58% JV stake. This is a risk to the thesis, as the European operations are terrible. My hope is that TAP does not double down on this region, as the 2014 EBITDAM was a paltry 11.9%. This issue will be a big focus on the ‘shallow dive’ project.
PRO FORMA FINANCIALS
If TAP purchases the 58% stake at 10X 2014 EBITDA with 100% debt, pre-synergy leverage would rise to 5X. If the $1.94B pension is included, leverage is 5.7X. After synergies leverage falls to 4.4X, including pension, but assuming no cash build/debt paydown.
I would strongly prefer 100% debt, but likely TAP issues some equity – perhaps 25% of the deal price.
Assuming 25% stock, 5% interest rate, $90 issuance price, and a 30% tax rate, “New TAP” earns a pro forma $6.90. Between 15X and 20X, TAP is worth $103 to $138.
At 100% debt, 5% interest rate, and 30% tax rate, TAP earns $7.44 and is worth between $112 and $149.