Some Molson shareholders decry merger

Modern Brewery Age,  Jan 10, 2005  

Tags: FINANCE, Investment, merger, Molson Coors Brewing Co., shareholder

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AP--Last week, several major shareholders of Molson Inc. condemned the company's proposed merger with Colo.-based Adolph Coors Co., while two large shareholder advisory firms supported the deal. Toronto investment firm Burgundy Asset Management Ltd. said the deal "makes no sense at all" because it doesn't place enough value on the brewer's highly profitable business in Canada.

However, Maryland-based Institutional Shareholder Services and Fairvest, Canada's leading independent proxy advisory firm, recommended on Tuesday that Molson and Coors shareholders approve the merger.

Coors and Molson shareholders will vote on the so-called "merger of equals" in Golden, Colo. and Montreal, respectively, on Jan. 19.

If approved, Molson shareholders will receive 0.36 shares in the enlarged company for every Molson share they own, giving them about 55 per cent of the new entity, to be called Molson Coors Brewing Co., the fifth-largest brewer in the world.

Burgundy said the union will be as big a mistake as Molson's decision to spend nearly $830 million for majority control of Cervejarias Kaiser Brasil SA, Brazil's second-largest brewer, in 2002--a deal Burgundy calls a "value-subtracting blow."

Burgundy says in a six-page note to clients that chairman and controlling shareholder Eric Molson is handing Canada's largest beermaker over to Coors at a bargain price because of "a fundamental valuation mistake" in merger negotiations.

But ISS reports released this week said Coors shareholders would gain from "improved scale, a better mix of revenues and earnings" and "cost savings". The ISS told Molson shareholders "the components are well balanced."

"A larger company would cushion the effects of Brazil and diversify its exposure towards the US and UK and also release additional operating earnings (via synergies) to support its market position," ISS added.

"Despite concerns over governance issues, the analysts thought it looked like a value-enhancing deal," Fairvest president William Mackenzie told The Associated Press.

He noted, though, that his company's decision to endorse the transaction was "not a slam dunk" because of concerns the new board's structure would not fairly represent shareholders.

Molson president and CEO Daniel O'Neill said in a release he was "very pleased" that "Fairvest has confirmed the (merger's) strategic and economic benefits."

Burgundy senior vice president David Vanderwood said the merger's key problem is the large gap in the companies' profit margins. Molson's five Canadian breweries earn almost four times as much money per hectoliter (26.4 gallons)as Coors does.

Burgundy is the second-largest Canadian investment manager to go public with its opposition to the merger, currently valued at about $6.6 billion. Jarislowsky Fraser Ltd. has said it would vote against the deal. In recent statements Jarislowsky Fraser expressed discontent with the current management structure, and indicated it was still against the deal.

In addition, the Canadian equity value team at TAL Global Asset Management, which controls about 500,000 Molson class A shares, said it would prefer scenarios that would better recognize Molson's "excellent cash flow capabilities", such as conversion to an income trust.

And most recently, an unidentified portfolio manager, said to hold more than one million Class A shares, told Reuters that he was adding his voice to the anti-merger chorus. "We have real problems with the corporate governance of the organization going forward. With the voting agreement going towards the family, they have 100 percent control over the company," said the portfolio manager, who holds more than 1 million Molson class A shares and asked not to be identified.

"Having said that, if the price was right we would still be in favor of this deal. But it's just not enough. There are some great Canadian assets that we feel are being sold to lower valuations."

He said his firm plans to reject the merger at a vote set for mid-January.

Analysts said that Molson might have to sweeten the deal again if it hopes to get the recalcitrant investors on board.

Last November, Molson said a dividend of C$3.26 would be paid on each class A nonvoting and class B common share, on top of the all-stock exchange.

The merger is being put to a shareholder vote Jan. 19, leaving little time for Molson to get its duck in a row.

For the deal to succeed, it needs the approval of shareholders representing two-thirds of both Molson's class A nonvoting shares and class B voting shares, as well as each class of Coors shareholders.

Under the terms of the agreement, Molson shareholders would control about 55 percent of the combined brewer, but the combined company would remain in the control of the Molson and Coors families.

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