Molson to Merge with Coors
IT WAS JUST two years ago that Dan O'Neill was hailed as the man who saved MOLSON Inc. from a swamp of inefficiency and waste. Now, it seems, O'Neill may go down in history as the chief executive who hastened the brewer's demise as an independent Canadian company. On July 22, Molson announced plans to combine with Adolph Coors Co., the third-biggest brewery in the United States, in a "merger of equals" valued at more than $8 billion, creating a new "Canadian-American" company called Molson Coors Brewing Co. For a business that has long worn nationalism on its sleeve with the proud marketing boast "I am Canadian," that seems almost unthinkable.
The merger attempt comes amidst a simmering feud within the Molson family, heirs to a brewing empire founded in 1786 that now stands as the last Canadian-owned beer giant since archrival Labatt sold to Belgium's Interbrew in 1995. But analysts say the problems that brought Molson to this point go beyond family bickering. To a large extent, they are playing out on the city streets of Brazil, where O'Neill's ambitions have crumbled. "Dan doesn't have a strategy," says Michael Palmer, president of Veritas Investment Research. "Some of Molson's problems appear to be intractable, and I think a lot of that has to be laid at Dan's feet."
Such an indictment would have been almost unimaginable back in the days when Dan O'Neill could do no wrong.
When O'Neill joined Molson in February 1999 as chief operating officer in charge of the brewing business, he came with a stellar reputation as a marketing whiz. Raised in Ottawa, O'Neill earned his business stripes in the U.S., rising through the ranks of the Campbell Soup Co., and later H.J. Heinz. At the time of his arrival, Molson was in bad shape. Revenue growth was anemic, its shares had fallen 18 per cent in a year, and its seven breweries across the country were running far below capacity. O'Neill launched "Project 100," a program aimed at carving $100 million from Molson's costs over three years.
First, he slashed the company's office staff and closed an Ontario brewery. The following year, he shut down a facility in Regina and sold the Montreal Canadiens hockey team. He saved millions more simply by reducing the amount of beer spilled in the bottling process. The effort was so successful, it was soon re-named "Project 150," targeting another $50 million in savings. O'Neill also hiked beer prices, helping to raise operating profit by two-thirds in the three years between his arrival and March 2002. Over that period, its stock more than tripled.
But a rising share price obscured an unsettling trend below the surface. Molson's brands - including Canadian, Export, Dry and Rickard's - were losing their grip on the consumer. In 1999, together they held 36 per cent of the Canadian beer market; by early 2002, that had slipped to below 32 per cent. The decline was offset by the rising popularity of foreign beers that Molson distributes in Canada - such as Heineken, Corona and Coors Light - but the company collects only part of those profits. Over the past two years, the erosion in Molson's own brands has continued: its core products are now down to a 28-per-cent market share.
So, in March 2002, O'Neill took a bold step aimed at making Molson an international player, paying US$765 million to acquire Cervejarias Kaiser SA. It was an audacious move into an important beer market. But what has unfolded since has been "an unmitigated disaster," in the words of David Hartley, an analyst with First Associates Investments in Toronto. Veritas' Palmer is even more blunt: "Brazil is a joke. They got sold a bill of goods. They bought a struggling company from a bunch of Coca-Cola bottlers who couldn't wait to get it off their hands, and then were reliant on those same bottlers for their distribution."
Those Coke distributors quickly proved incapable of or uninterested in selling Kaiser beer, and its share of the market dropped to just over 12 per cent within two years of purchase. Hoping to turn the tide of Brazil's beer war, Molson recently unleashed an army of salesmen who zip through the streets of São Paulo and other Brazilian cities on motorcycles adorned with the Kaiser logo. Molson has tried to sell its Brazilian brand A Marca Bavaria as a "premium import" in Canada. But so far, those efforts have gone nowhere: Kaiser's market share is now down to just under 11 per cent, and Bavaria is a minor player here.
Last January Molson slashed its growth forecasts, sending the stock tumbling, and its latest results showed a 19 per cent drop in profit. All that has worsened the developing rift between chairman Eric Molson, who controls the majority of voting stock, and Ian Molson, a cousin who controls about 10 per cent. Ian resigned from the board in June, and called on Eric to retire so new blood could take over. Instead, Eric has turned to Golden, Colo.-based Coors as a friendly merger partner.
Ian is staunchly opposed to the merger, and he is not alone. Industry analysts say the Coors-Molson union makes little sense, because the two companies are both struggling with stalled growth in their home markets and few obvious options for expansion. And though the merger would allow the Molson and Coors families to maintain some control over their destinies, it provides few benefits for shareholders. Prudential Equity Group analyst Jeffrey Kanter calls it a "marriage of convenience" that "would not create a better company, just a bigger one." That point is echoed by Hartley: "The amalgamation of these two companies is more about maintaining the Molson family empire than it is about maximizing shareholder value." As for O'Neill, he would hand the top job in the merged entity to Coors' CEO Leo Kiely. But he'll make out handsomely: as of June, he held $32.6 million in Molson stock options, which he can exercise at any time.
There is no guarantee the proposed marriage will be consummated. The deal requires the support of two-thirds of Molson shareholders, and given the significant opposition, that will be a tough target to meet. But to many analysts, some kind of takeover now appears inevitable. Either Molson combines with Coors or it will be bought out by someone else - perhaps another foreign giant, like Heineken NV, or an investment group led by dissident members of the Molson family. And while many Canadians will lament the loss of a national icon older than the country itself, industry analysts see more at stake than national pride. Given the state of Molson's business and Dan O'Neill's strategy, they say, a takeover may be the only way to turn Molson around.
Maclean's August 2, 2004