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Canada: A few thoughts on the Molson-Coors deal after two weeks of listening to company webcasts, tinkering with my spreadsheets and reading the foreign press . . .

It's easy for some to suggest the Coors family is taking over Molson and calling it a merger of equals. But don't put too much faith in the idea that the Coors family is united, unlike a divided Molson family, with dissident cousin Ian opposing chairman Eric.

First remember that Molson shareholders will get 69 percent of the votes in the combined company, while Coors shareholders get 31 percent of the votes.

What's even more important is how they arrived at that figure. Molson, as a whole, is a more valuable company because of its superior profit margins. But it also has more than three times as many shares as Coors, so Molson stockholders will have to swap nearly three shares in their company for one share in the new Molson Coors. This is true not only for the public's shares, but also for the Class B voting stock held by the Molson family and others.

Economically, each Molson share gets .36 Molson Coors share. The voting stock gets split, with Molson voting shares getting .126 voting Molson Coors shares and .234 nonvoting shares.

Here's the secret to that weird -ratio: Take the 10 million shares Eric Molson owns and multiply by .126. Voila, you get 1,260,000 Molson Coors voting shares - the exact number that will be owned by the entire Coors family because they're swapping one-for- one.

Now, recall that there also are more than 2.4 million shares in the estate of the late T.H.P. Molson, which Eric and brother Stephen Molson also control. So the united members of the Molson family get more votes than the Coors family even before dissident Ian is in the picture. Throw in the other holders of Molson B shares, and you see that when Coors acceded to Eric Molson's desire to match them vote for vote, they handed over two-thirds control to the Canadians.

In the short term, this is academic, because Eric Molson and the Coors family are entering a voting trust in order to share power.

But expect Eric Molson to assert a lot more influence as chairman than some non-owner CEO emeritus like Michael Armstrong, who just retired as Comcast chairman. While Coors CEO Leo Kiely and CFO Tim Wolf take those spots in the combined company, Molson CEO Daniel O'Neill gets put in charge of synergies and integration, meaning a Molson guy will be picking winners and losers in the new company.

It may not be a merger of equals, but it's not a clear Coors takeover either. If nothing else, in the long run, this company is in the hands of the Canadians.

Yet, interestingly, it's Coors shareholders who are taking a short-term hit in at least one financial metric: free cash flow per share.

Let's take the Molson-Coors definition of EBITDA - or earnings before interest, taxes, depreciation and amortization - minus capital expenditures. Coors' $347 million in free cash flow, spread out over 37.2 million shares, is a chunky $9.33 per share.

Then do the merger math: Mix in Molson's cash flow and issue the shares in the combined company. The result is each Coors shareholder gets a Molson Coors share with $8.51 of free cash flow. Talk about Coors Light and Molson Golden.

This occurs because Coors brings 49 percent of the combined cash flow to the new company, yet Coors shareholders are getting only 45 percent of the stock.

If Kiely and O'Neill deliver on their promises of $175 million in synergies, the rising tide will lift both boats. Each share of Molson Coors will generate $10.62 in free cash flow. That'll give Coors shareholders a 13.8 percent boost in free cash flow per share. Molson shareholders will see a 35.4 percent increase.

To be fair, all sorts of financial metrics go into a deal like this. Free cash flow isn't everything - just almost everything.

Finally, despite all these things that Molson shareholders can cheer, the Canadian media have been decidedly more negative than their Colorado counterparts.

From the financial side, many question why Molson won't acknowledge it's a slow-growth company and convert to an income trust, a Canadian structure designed to distribute the bulk of corporate profits to shareholders. That would be preferable to a no- premium deal, critics say.

An example of the sharp commentary, from Eric Reguly of The (Toronto) Globe and Mail: "Coors, it should be noted, didn't run off to Latin America and blow its brains out on a loser brand."

From the nationalist perspective, the Molson-Coors deal sells out a company whose "I Am Canadian" ad campaign sparked a national patriotic debate on creeping Americanism. Says comedian/columnist Bob Robertson, also in The Globe and Mail: "I intend to spend the rest of the summer sitting back with a tall, cool glass of Molson/ Coors Light, you know, the one that has the slogan, "I was Canadian."


06 August, 2004