Molson not prepared to play the consolidation game
create value for shareholders or build for the future, according to
Canadian brewer Molson.
The company has just completed a review of a 1999 study of the international beer market, on the basis of which Molson launched itself into M&A arena with the acquisition of Brazil's Cervejarias Kaiser in December 2000.
The new study covered all five continents, the main brewers and brand portfolios in each country, the population demographics as well as the prospects for beer consumption in these markets, and revealed that while the pace of consolidation was still accelerating, it was still low compared to that in other consumer goods categories.
Molson's study also showed - not surprisingly - that the largest brewers are increasingly international in focus, that the big five brewers each have a worldwide presence, and, tellingly, that deal multiples have increased significantly over the past two to three years with the result that many acquisitions have not been value creating for shareholders.
"Molson has moved up from 21st to 15th in international volume rank over the past three years, yet it has not followed the pace of consolidation," said Daniel J. O'Neill, president and CEO of Molson. "That said, the study was extremely useful in that it demonstrated that at current valuation multiples, participating in consolidation for the sake of participating would not lead to value creation."
He said that the study had allowed the company to validate the value potential of its international business. "Molson's international strategy will start with strong execution in current markets - Canada, the US and Brazil - with future M&A activity not being a requirement in the short-term," he said.
"M&A activity could take place in the mid-term and would be undertaken if it could incrementally enhance shareholder value, above and beyond the current footprint."
The initial focus for Molson will be on its home market, where there is the greatest potential value creation, although he stressed that big things were expected from the Brazilian unit in the longer term. In the US, the largest imported beer market in the world, success would mean doubling volume levels and establishing Molson as one of the top three import brands, he added.
"If Molson can deliver the tremendous value potential of its current footprint - Canada, Brazil and the US - the advantages of delaying further international expansion far outweigh the risks of not moving aggressively and the corporation could generate EBIT in excess of $1 billion by fiscal 2009," he added.
This is a big 'if', however, and Molson has taken a bold decision by actively deciding to buck the consolidation trend. Building up sales in all three of these markets will not be easy. Both Canada and the US are mature markets with growth expected only in certain segments (light beer, premium imports) and while Brazil has greater potential the combination of a weak economy and strong competition from market leader AmBev does not necessarily make it an easier place to build sales.
Whether Molson has taken the right decision or not should become evident fairly quickly. If consolidation continues to gather pace, any company which is not a buyer is likely to be seen as a target, especially a medium-sized player with strong brands such as Molson.
