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Senior executives of Molson and Adolph Coors are on the road this week to persuade investors to support their $8-billion merger. Theirs is a simple, two-part sales pitch. Part one is the warm-and-fuzzy stuff -- how the two companies will be more efficient as one, how they'll be creating the world's fifth-largest beer company, ready to conquer the brewing world, and so on, and so on, The Globe and Mail commented on July 27.

Unconvinced? Then prepare for part two: the knife to the throat. If another player swoops in to buy Molson, the executives warn, Coors will tear up the two companies' successful partnership, in which they split profit from sales of Coors Light in Canada.

"What we've said, and been very clear about, is in the case of a financial buyer or a competitor coming in with an offer, our brand doesn't go with 'em," Coors chief executive officer Leo Kiely told this newspaper. That would cost Molson tens of millions in profit. So vote your shares in favour of this deal -- or else. Is he being straight? Or is he bluffing, to try to scare off a rival bid from Ian Molson and Onex?

"Bluffing, bluffing, bluffing," says David Hartley, an analyst at First Associates Investments in Toronto. He is not alone in his view. On Bay Street and Wall Street, Mr. Kiely's threat -- one that is echoed by Molson CEO Dan O'Neill -- is being met with skepticism, even anger.

"It's despicable," says one Molson shareholder who spoke on condition of anonymity. The two CEOs "are just trying to blow smoke to get it out there in the press . . . I think it's ridiculous."

Molson and Coors have worked in Canada for a long time, and have been equal partners, more or less, since 1998, when Molson bought back the half of its brewing operation it didn't own from Foster's Brewing Group of Australia. Today, Molson brews and sells Coors Light at its five domestic plants and keeps 49.9 per cent of the profit. The deal helps the Montreal-based brewer reduce its costs, since it can run its plants closer to full capacity.

There's no denying the Coors contract has become an important source of profit for Molson. What Mr. Kiely isn't so keen to admit is that it's just as critical to Coors.

Last year, the Coors Canada partnership contributed $47.5-million (U.S.) to Coors, or about 18.7 per cent of its pretax profit -- yes, from little Canada. It's right there in Coors' latest annual report, on page 53.

So Mr. Kiely can't bolt from this country, where Coors Light has garnered about 8.5-per-cent market share, and grows every year. His options are to make it in the United States and truck it north (expensive), build breweries here (even more expensive), or find a new deal in Canada. But with whom?

Labatt Brewing is the only other beer maker with Molson's size and distribution network, but it's not available. Labatt has a perpetual contract with Anheuser-Busch to brew Budweiser and Bud Light, and it's working just fine, thank you. (Bud, by some estimates, is now Canada's No. 1 beer.) Sleeman Breweries has plants from coast to coast, but its breweries can produce just 18 million cases of beer a year and have little capacity to spare. Coors Light sold more than 20 million cases in Canada last year. "We could expand all of our plants if Coors wanted us to," says CEO John Sleeman. But he's lukewarm to the idea. "We traditionally have not played in the mainstream. . . . It's not particularly on our shopping list."

Some regional breweries have some excess capacity, but no one has Molson's national network -- nor its marketing clout, Mr. Hartley says. You want to sell beer at the Molson Indy? At a Toronto Maple Leafs game? You've got to be part of the Molson group. If Coors walks away, what will happen to its sales in Canada?

Not everyone thinks Mr. Kiely is bluffing. Michael Palmer, the long-time Molson analyst who runs Veritas Investment Research, think Coors would have alternatives. It could get Molson to brew Coors Light, but take away the marketing and sales parts of the contract, he says -- thus keeping a greater share of the profit for itself. Or it could put together another arrangement, perhaps shipping some from the United States while making some at regional breweries in Canada.

Maybe. But Coors has no meaningful experience marketing on its own in Canada. Coors Light is a cash cow here, and much of the credit belongs to Molson. What would Mr. Kiely's shareholders say if he just walked away in anger?


28 July, 2004