As the acquisition of the remaining 58% of MillerCoors becomes more likely and its earnings enhancement becomes more clear, coupled with the continued strong price inflation for beer in the US and Canada, we are increasing our fair value of the company to USD110 and move our recommendation to Buy
The USD12bn acquisition to gain full control of MillerCoors is a game changer for Molson Coors. Not only is there the immediate EPS accretion with 2017 EPS of USD5.45, which is an increase of 43% from a stand-alone EPS of USD3.81 in 2016e. But the strategic impact is likely to be even bigger. With the acquisition, the company is gaining a fully-integrated stable number two position in the North American market. As a result, the company’s free cash flow profile is changing dramatically from on average USD800m p.a. over the past five years (2012-2016e) to nearly USD2bn p.a. from 2017 onwards. This should provide the company with the ammunition to accelerate acquisition-driven growth.
Existing efficiency plans at MillerCoors and Molson Coors, together with the synergy estimates from the acquisition, should combine into an annual USD150-200m of efficiency improvements (1.3% to 1.7% of net revenue) for the coming 3-4 years. We would expect the company to keep most of these savings in its North American operations helped by the quasi-duopoly shared between Molson Coors and AB InBev. Indeed, despite the global commodity price deflation, beer price inflation in both the US and Canada is currently over 2%.
The high-end beer segments are highly profitable and growing. However, in the US, MillerCoors’s high-end brands are only 10% of its total volumes, whereas it is 1/3rd of the market. Getting full control of the profits generated by import brands Peroni, Pilsner Urquell and Foster’s (more money available to motivate distributors) will help and add to the investments behind Blue Moon, Leinenkugel , Redd’s, Henry’s hard soda and, the recently acquired, Saint Archer craft brewer. On top of this, the company has been rejuvenating its mainstream Miller Lite and Coors Light brands.
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