MOLSON COORS CANADA INC. (Toronto symbols TPX.A $56 and TPX.B $54; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 181.5 million; Market cap: $10.0 billion; SI Rating: Average) is the world’s fifth-largest brewer by volume. It operates mainly in the United States (58% of 2007 sales volume), Canada (19%) and Europe (23%). Molson Coors also exports its products to Latin America and Asia. Leading brands include Coors Light, Molson Canadian and Carling.

The company took its present form on February 9, 2005 through the merger of Canadian brewer Molson Inc. and U.S.-based Adolph Coors Co. The families of the two founding companies control roughly 84% of the votes.

Canadian investors received exchangeable shares of Molson Coors Canada for their Molson shares. These exchangeable shares are equivalent and exchangeable into common shares of parent company Molson Coors Brewing Co. (New York symbol TAP).

The main reason behind the merger was cost savings in the face of growing competition. The company has now cut its annual costs by $180 million, which is $5 million more than its original target of $175 million (all amounts except share price and market cap in U.S. dollars).

It now aims to find an additional $250 million in annual savings over the next three years. Most of
these savings will come from outsourcing administrative and back office functions.

Lower costs spurred earnings

Thanks mainly to lower costs, Molson Coors’ earnings rose from $1.98 a share (total $316.1 million) in 2005 to $2.79 a share ($507.4 million) in 2007. Cash flow per share grew from $4.14 in 2005 to $4.72 in 2007. Sales rose from $5.5 billion in 2005 to $6.2 billion in 2007.

Molson Coors recently merged its operations in the United States and Puerto Rico with those of rival brewer SABMiller. Each company has a 50% voting interest in this new joint venture, called MillerCoors, but Miller has a 58% economic interest while Molson Coors has 42%.

This new joint venture accounts for about 30% of the beer market in the U.S. (Molson Coors currently has just 11% of the U.S. beer market). That should help it compete with Anheuser-Busch, which accounts for about half of U.S. beer sales.

More savings on the way

MillerCoors forecasts restructuring costs of $450 million. But it should save $500 million a year by the end of the third year.

The savings will help it cope with rising prices for raw materials and transportation. MillerCoors’ bigger size should also improve its ability to negotiate better prices from suppliers under longterm contracts.

The savings will also give Molson Coors more cash for marketing and new product development.
An effective marketing campaign can attract new customers, or spur fresh interest in older brands.

Thanks to several successful promotions in the past few years, Coors Light is now the top-selling
light beer in Canada and accounts for 10% of the Canadian beer market. Molson Coors itself accounts
for about 41% of Canada’s beer sales.

Molson Coors is also doing a good job developing new beverages that help it compete with premium beers from specialty brewers.

A good example is Blue Moon, a Belgian-style beer with a citrus-like taste. Flavoured beers like Blue Moon appeal to younger drinkers, and earn higher profit margins than regular beers. Brands such as Keystone Light are also helping the company compete with value-priced beers.

Molson Coors has about 21% of the UK beer market, where it mainly sells Carling (75% of UK sales) and other local brands. The company hopes that its recent re-launch of Coors Light in the UK will expand its sales and market share.

Exports help cut reliance on pubs

The company sells 60% of its beer in the UK through pubs. However, new anti-smoking laws have prompted more people to consume beer at home instead of pubs. The company tends to earn
higher profits on sales in pubs that through retail stores, so this shift could hurt the UK division’s
profitability. However, rising exports to other parts of Europe help improve its long-term prospects.

Molson Coors is also using its improving cash flow to strengthen its balance sheet. Long-term debt
of $2.0 billion U.S. is a reasonable 20% of its market cap. It also has $118.7 million U.S. ($0.65
U.S. a share) in cash.

The stock has gained over 50% since the 2005 merger. The class ‘A’ shares now trade at 16.1 times
the $3.45 U.S. a share that Molson Coors should earn in 2008 (15.5 times for the class ‘B’ shares).
That estimate excludes any contribution from the newly formed MillerCoors partnership.

The shares are also attractive in relation to Molson Coors’ sales of about $34.50 a share. The
$0.80 U.S. dividend yields 1.4% for the ‘A’ shares, and 1.5% for the ‘B’ shares.

Molson Coors is a buy. The cheaper ‘B’ shares are the better choice.