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E-Malt.com News article: 3219

Canada: Adolph Coors Co. revealed on September 8 that it could force Molson Inc. to continue brewing Coors Light in Canada for 10 years without the benefit of a lucrative profit-sharing agreement if another group won control of the Montreal-based brewer. Analysts said the disclosure substantiates Coors' repeated threats that it would abandon its profit-sharing relationship with Molson if the Montreal-based brewery sells out to a rival suitor instead of completing its proposed merger with Coors. It also dims the prospects for a competing bid, according to Michael Palmer, president of Veritas Investment Research Corp. "It is an effective poison pill ....." he said. "That puts paid to any notion that there's going to be a counterbid."

In July, the companies proposed a full merger, which would see Molson Coors Brewing Co. become the world's fifth largest brewery. Coors chief financial officer Tim Wolf spelled out a backup plan for the Canadian market on September 8 one day after Molson chief Dan O'Neill acknowledged that a proposed merger of the two breweries may not win shareholder approval.

Mr. Wolf said that if Molson sells out to a rival bidder, Coors would exercise a change-of-control clause forcing Molson to continue brewing Coors Light for a decade while losing its lucrative profit-sharing arrangement. Molson's former deputy chairman Ian Molson is widely believed to be working on a rival bid, with the support of Toronto-based Onex Corp. and possibly another brewery. "If a financial buyer or competitor were to acquire Molson, we would exercise our rights, guaranteed in our contract, and take full control of our brand in Canada .....," Mr. Wolf said yesterday at an investors' conference in Boston. "We also have the right to have Molson produce and distribute Coors Light for us in Canada for 10 years, under essentially the same terms as it does for the joint venture today."

As a result, Coors would be able to double its profit from Canadian sales to $100-million (U.S.) a year, Mr. Wolf said. "In short, we would come out very significantly ahead of where we are today in terms of profit." Mr. Wolf emphasized that Coors' first preference is to complete its proposed merger with Molson. He said the so-called merger of equals represents the most upside for the Coors Light brand in Canada and provides the "greatest value creation" for Molson and Coors shareholders.

Under an existing profit-sharing arrangement, Molson brews and sells Coors Light in Canada, while Coors looks after Molson brands in the United States. Mr. O'Neill has said that its partnership with Coors represents about 20 per cent of the value of Molson's shares. Mr. Palmer estimates that Molson generates about $70-million (Canadian) in profit from the Coors partnership, plus another $25-million or so from brewing, packaging and distributing the beer.

Coors executives have repeatedly said that they would abandon their partnership with Molson if another bidder took control of the company. "This is a business decision based on our assessment that by taking full control of the brand, we can make significantly more money than we do currently," Mr. Wolf said on September 8.

Some analysts and investors have expressed skepticism about whether Coors would actually follow through on the threat, in part, because it wasn't clear that Coors would be able to supply the Canadian market without Molson.

The Molson-Coors proposal needs to be approved by two-thirds of the holders of each class of shares, voting and non-voting. The voting shares are controlled by chairman Eric Molson, who could block a rival bid. But the non-voting shares are believed to be in the hands of funds and retail investors who aren't thrilled by the prospect of the Molson-Coors merger.

In an interview with The Globe and Mail on Tuesday, Molson CEO Dan O'Neill said the company hasn't done a good job of selling shareholders on the merits of the proposed merger. He acknowledged that the deal might not get the support of the company's class A shareholders. He said the shareholders appear to be skeptical because they are anticipating a better bid.

In another development on September 8, Heineken NV said it will likely write down part of the value of its 20-per-cent stake in Cervejarias Kaiser Brasil SA, the second largest brewer in Brazil, raising questions about whether Molson will do the same. Molson paid about $1-billion for the other 80 per cent of the brewery, which has failed to meet expectations. Molson's class A shares closed up 13 cents yesterday to close at $32.63 on the Toronto Stock Exchange.

10 September, 2004

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