Events: Molson Coors High Level Market Overview October 2015

Molson Coors Brewing Company

Events: High Level Market Overview

October 17, 2015


SUMMARY INFO

  • NYSE: TAP
  • Recent PPS: $88.30 (10/16/15 close)
  • Shares Out: 186.1 million
  • Market Cap: $16,433
  • Net Debt: $2,562
  • Enterprise: $18,995

QUICK UPDATE

TAP Analysis October 2015 (Update 1)

Upon further review, I realized that I was off in my implied analysis of TAP’s European segment EBITDAM in Friday’s write-up. I implied that TAP’s Canadian EBITDAM was 25% and its European EBITDAM was 11.9%. It did not affect the valuation work, but for clarity the segment EBITDA margins are as follows:

  • Consolidated: 19.3% (ex. MillerCoors)
  • TAP CAD: 20.2%
  • TAP UK: 10% (estimated)
  • TAP CEE: 34% (estimated)

Because TAP consolidates its UK and CEE operations into one ‘Europe’ segment, UK and CEE EBITDA margins must be estimated. In 2012 TAP acquired Central & Eastern European operator StarBev for $3.54B, and at the time StarBev’s EBITDAM was approximately 34%. I will dig deeper in the coming days, but for now I assume the CEE segment remains at 34%. As such, the implied UK EBITDAM is 10%.

DISCUSSION

Upside. The more I mull over TAP and the global beer market the more I believe TAP is potentially quite interesting beyond the near-term MillerCoors consolidation ‘event’. Three forms of additional upside, not necessarily mutually exclusive: 1) well beyond the scope of the near-term work I will do on TAP is the potential for TAP to turn into a consolidator/developer of U.S. premium beer (craft, cider, etc.); 2) TAP acts as a ‘beach head’ acquisition for Heineken as a way into the U.S. market; 3) TAP uses its StarBev platform to roll up Central & Eastern European market share.

StarBev. I just do not understand this purchase. In a world of consolidation and concentration, why did TAP venture outside of its core markets into a heavily concentrated CEE market? Was TAP management highly visionary, believing that it could leverage its StarBev stake in negotiations with ABI post SAB acquisition to roll up SAB’s current share? Will it use the stake to roll up non-SAB market share post-MillerCoors consolidation? Would Heineken view the StarBev stake as an added bonus to a full consolidation of TAP given its strong market share in Hungary and Romania? Perhaps the answer is obvious and I am simply missing something; but I just do not see the Miller, Coors, Molson Canadian, and Carlson brands turning into formidable global brands without uneconomic investment…thus there must be more to this asset given TAP’s “Profit After Capital Charge” (PACC) operating framework.

CEE. ISI analysts cite the Central & Eastern Europe beer market as a potential source of cash for ABI post SAB transaction, and they highlight Carlsberg as a natural buyer given the complementary nature of SAB’s CEE business. Rather, as discussed above, I could easily see TAP leveraging its StarBev platform to bid for these assets – why not? Depending upon government constraints around market share, TAP could scale up its StarBev platform; financing is cheap; and a fully consolidated MillerCoors will be a deleveraging cash cow within a couple of years. So, would not be a surprise to see a joint MillerCoors/CEE announcement alongside an official ABI/SAB transaction.

Heineken. I need to study the U.S. market more closely to better assess the potential for a Heineken/TAP merger, but a TAP acquisition makes sense on the surface to gain a toehold in the mature, yet valuable U.S. beverage market. The biggest question is the willingness of the Molson/Coors families to sell, with a close second being the willingness of the Heineken family to dilute their stake, if at all (as TAP may do to purchase MillerCoors, Heineken could issue non-voting shares in order to maintain 51% control).

I would be curious to talk to a market expert to get a sense for mechanically how Heineken would leverage the TAP platform in the U.S. Does TAP’s existing distribution network have capacity to neatly fold in Heineken products (i.e. end markets, as well as physical distribution), or would Heineken simply replace a portion of MillerCoors’ 27% market share over time with Heineken products? Likewise, are existing brewing facilities easily expanded to accommodate new production? All relatively unclear to me at this time.

What I do know is that with capital markets extremely friendly, and large competitors consolidating around them, it would be very easy for Heineken to catch the large-scale M&A ‘bug’…

GLOBAL BEER MARKET OVERVIEW

Key Players/Ownership Structures

  • Anheuser Bush Inbev
    • Controlled by Brazilian (3G partners) and Belgian families with >50% ownership pre-SAB purchase
    • Post-SAB purchase, Altria and Santo Domingo will become major ABI shareholders, potentially diluting Brazilian/Belgian family to <50%
    • According to ISI, the post-SAB ABI BOD could look as follows:
      • Brazilians: 4
      • Belgians: 4
      • Independent: 3
      • Modelo Family: 2
      • Altria: 2
      • BevCo/Domingo Family: 1
      • SAB Mgmt: 1
      • Total: 17
  • SABMiller
    • Altria: 27%
    • BevCo (Domingo Family): 14.1%
    • South Africa Government: 4.2%
  • Heineken
    • L’Arche Green N.V.: 51.709%
      • 88.67% owned by the Heineken Family; 11.33% by the Hoyer Family
    • FEMSA: 14.935%
    • Public: 33.356%
  • Carlsberg
    • Carlsberg Foundation: 30% economic/75% voting
    • Public: 70% econmic/25% voting
  • Molson Coors
    • 90% voting stake by the Molson/Coors family trusts

2010 Market Share Data

Still working thru granular 2014 market share data, but preliminarily the following Jefferies 2010 analysis of the global beer market is a good overview.

  • Global: 1843 million hectoliters
    • ABI 20%
    • SAB 16%
    • Heineken 10%
    • Carlsberg 6%
  • North America: 278
    • ABI 49%
    • SAB 27%
  • Latin America: 298
    • ABI 42%
    • SAB 12%
    • Heineken 15%
  • APAC: 635
    • ABI 8%
    • SAB 15%
  • Africa & ME: 111
    • SAB 42%
    • Heineken 17%
  • Eastern Europe: 242
    • ABI 12%
    • SAB 15%
    • Heineken 16%
    • Carlsberg 25%
  • Western Europe: 279
    • ABI 10%
    • Heineken 17%
    • Carlsberg 11%

TAP MARKET DATA

  • United States: 27% (assuming full consolidation of MillerCoors)
  • Canada: 37%
  • UK: 17% (in 2010, according to Jefferies)
  • Central & Eastern Europe (per StarBev acquisition presentation for TAP; 2010 Jefferies for Heineken; ISI for others):
    • Czech Republic:
      • TAP 16%
      • SAB 47%
      • Carlsberg 0%
      • Heineken 12%
    • Hungary:
      • TAP 23%
      • SAB 34%
      • Carlsberg 2%
      • Heineken 25%
    • Romania:
      • TAP 14%
      • SAB 29%
      • Carlsberg 10%
    • Slovakia
      • TAP 5%
      • SAB 38%
      • Carlsberg 0%

 

SOURCES: Company Filings. Company Presentations. Jefferies. ISI. Analyst Estimates.

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