SABMiller and Molson Coors Announce U.S. Joint Venture

SABMiller‘s Chief Executive Graham Mackay must have done some heavy schmoozing to convince the Coors people to enter into a venture with the world’s number two brewer.

Didn’t we tell you so? On these pages, about two months ago, we published a piece on SABMiller’s European head, Alan Clark, doing the rounds. We commented then that Alan Clark Meets the Press should never have happened - unless he was letting the world know that he was interested in succeeding Graham Mackay and/or Graham Mackay was busy putting a deal together. Lo and behold, so he was. While Alan Clark was telling us why buying into the German market was no option for SABMiller at this stage, his boss was miles away in the U.S. putting the finishing touches to a deal that will transform the U.S. beer market into a beer duopoly.

In October, SABMiller and Molson Coors Brewing Company announced that they have signed a letter of intent to combine their U.S. and Puerto Rican operations. Coors’ British operations as well as Molson’s business in Canada will remain unaffected by this decision.

The new company, which will be called MillerCoors, will have combined net revenues of approximately USD 6.6 billion and beer sales of 69 million barrels (81 million hl), it was reported.

SABMiller’s CEO Graham Mackay said the venture would have almost a 30 percent share of the U.S. beer market, adding SABMiller’s 19 percent share to Molson Coors’ 11 percent. Anheuser-Busch has 50 percent.

In retrospect, it becomes clear why Coors Brewing Company head Frits van Paasschen decided to jump ship recently in order to join Starwood Hotels as CEO. Although he must have been privy to the talks between SABMiller and Coors – by all accounts they went on for a year – it is our guess that he would have been passed over in favour of Norman Adami, SABMiller’s man in the U.S. to lead the new venture. However, with Mr Adami’s unexpected decision to retire in November, the chair became vacant. Enter Coors’ veteran chief Leo Kiely.

Leading the MillerCoors management team will be Molson Coors Vice Chairman Pete Coors who will serve as Chairman. SABMiller CEO Graham McKay will serve as Vice Chairman. Molson Coors Chief Executive Leo Kiely will be the CEO of the joint venture, and Tom Long, Miller CEO will serve as President and Chief Commercial Officer.

You need not be a clairvoyant to predict that there will be a reshuffle of the executive suite in a few years’ time. Leo Kiely is already 60 years old.

It was also announced that SABMiller and Molson Coors will have a 50 percent voting interest in the joint venture and five representatives each on its Board of Directors. That both companies have an equal say despite the fact that SABMiller will have 58 percent economic interest and Molson Coors will have 42 percent economic interest, could be seen as proof that Coors required a lot of persuading to enter into this venture.

The transaction is expected to be completed by the end of 2007. The government and regulatory approval period for the venture will take at least six to nine months.

Given that the combination is expected to generate approximately USD 500 million in annual cost savings by the end of the third full year of combined financial operations, Leo Kiely, in a note to employees, had some explaining to do:

“The U.S. alcohol beverage industry is undergoing big changes, and we must find a way to meet the challenge. We have strong momentum in our U.S. business now. This deal will enable us to compete more vigorously in the U.S.

long-term with both domestic and international large-scale brewers, craft brewers, and wine and spirits producers that have either a much larger share of the market than we do, or are growing their share of volume and profit much faster than we can on our own.

We are combining our assets and operations in the U.S. and Puerto Rico to create a stronger, more competitive U.S. brewer with a more efficient business organisation and brewery network. The combination of Coors Brewing Company and Miller Brewing Company generates significant synergies and cost savings, enhancing the joint venture’s financial resources. This allows MillerCoors (…) to invest in creating stronger brands, increased innovation, and providing more choice to consumers. Because our geographic footprint is complementary, no brewery closures are planned.”

Leo Kiely wrote further that optimising the joint venture’s brewery network will reduce transportation costs and produce savings from the supply chain. As some commentators have remarked, this will not produce the USD 500 million in savings. Although Leo Kiely tried to alleviate any fears that there will be massive job losses, his statement that “by combining our U.S. operations with Miller, we will also be able to streamline overhead costs and target our marketing and sales efforts more effectively” still could be read as a subtle hint that jobs will eventually have to go in marketing and sales.

At present, no decision has been made with regards to the headquarter location for the MillerCoors joint venture. Currently, it is being sorted out what functions can be best managed from Milwaukee or from Golden, and what functions will need to come together in a common, central location. The integration team will work through these options over the coming months.

Apart from finding those USD 500 million in cost savings, the two brewers will have to convince analysts that no cannibalisation will take place inside the joint brand portfolio, consisting of brands like Miller Lite, Miller Genuine Draft and Milwaukee’s Best as well as Coors Light, Molson Canadian and Molson Dry beers.

Obviously, if Coors Light is brewed at Miller’s breweries around the countries, transportation costs will come down significantly. But what is going to happen to the Miller Lite brand that competes with Coors Light over the same consumers’ throats?

Upon announcement of the deal, SABMiller’s shares were up 1.8 percent at GBP 14.93 while Molson Coors’ were up 10.2 percent at USD 56.01.

Perhaps the market’s reaction serves as a reminder of the old Irish wisdom that one blind man and one one-legged man do not make an able-sighted runner. After all, SABMiller, that bought Miller in 2002, has struggled to make headway in the U.S. against Anheuser-Busch, especially in its attempts to push up prices. Irrespective of SABMiller’s prep talk, its U.S. market share has slipped below 20 percent and stayed there. Canada’s Molson combined with U.S. group Coors in 2005 and despite the success of Coors Light has also struggled to gain market share.

Interestingly, August Busch IV, President and CEO of Anheuser-Busch, deemed it necessary to immediately comment on the deal himself. In a memo, sent to all A-B wholesalers, he wrote that the MillerCoors joint venture "represents an attempt by these companies to better compete against us. This new entity does not match our size or portfolio of beers, yet there are undoubtedly synergies that this new company will eventually realise."

Busch claimed the deal also represents an opportunity for the A-B system. "There will be significant transition confusion from this change, and it’s up to us to capitalise on this disruption now."

Well, that remains to be seen.