Molson Coors Hits 52-Week High On EU Nod To Beer Deal

Shares of Molson Coors Brewing Company (NYSE:TAP) hit a 52-week high of $100.62 on May 27, after regulators with the European Commission approved the potential merger of beer giants Anheuser-Busch InBev (NYSE:BUD) and its rival SABMiller (LON:SAB) plc (OTC:SBMRY) , which in turn bodes well for Molson Coors. Shares of Molson Coors were up 0.85% on the day and eventually closed at $100.20.

Anheuser Busch reached a deal to acquire London-based SABMiller in Oct 2015. Per the deal, AB InBev is offering common SABMiller shareholders $67.59 per share, while SABMiller’s two biggest investors, Altria Group, Inc. (NYSE:MO) and the Santo Domingo family from Columbia will be offered cash and shares alternative worth about $60 per share. However, the deal is yet to receive shareholders’ and regulatory approval.

On May 25, 2016, per media sources, the two big global beer companies received approval to merge from the European Union's (EU) competition regulator, the European Commission. Anheuser-Busch InBev could receive the EU approval after it reached a deal with a Japanese brewing company, Asahi Group Holdings Ltd. in April to sell three of SABMiller's premium European beer brands for 2.55 billion euros. The sale included SABMiller’s Peroni, Grolsch and Meantime brands, along with their related businesses in Italy, the Netherlands, U.K. and internationally, minus certain U.S. rights.

How Molson Coors Stands to Gain?

Denver-based Molson Coors owns 42% of MillerCoors, its joint venture with SABMiller. It also agreed to purchase SABMiller’s 58% stake in MillerCoors in November. However, Molson Coors’ acquisition of the remaining Millers Coors is conditioned upon the closing of AB InBev’s $107 billion takeover of SABMiller, which is expected in the second half of 2016.

Besides purchasing SABMiller’s 58% stake in MillerCoors, Molson Coors plans to buy the Miller brand portfolio globally and retain the rights to all the brands currently in the MillerCoors portfolio for the U.S. market, including Redd’s and import brands such as Peroni and Pilsner Urquell.

We note that AB InBev-SABMiller merger is a critical one and would draw scrutiny from antitrust regulators, as this would be the biggest beer merger ever and could have wide implications on the worldwide beer market. The merger is bringing together the two largest beer companies in the U.S. with combined annual sales of over $70 billion. The concern with giant mergers like this is that the new combined company would wield too much power over pricing and hurt consumers.

AB InBev consequently agreed to divest SABMiller's 58% stake in MillerCoors to Molson Coors, in order to satisfy the U.S. regulators.

Molson Coors’ purchase of SABMiller’s stake would allow it to take strategic control of its operations in its biggest market. Molson Coors would also be in a position to gain significant synergies, which would allow the company to cut costs quickly. As the U.S. beer market grows slowly, lower costs will help Molson Coors to increase its profits in the coming years.

Per the Wall Street Journal, the purchase of SABMiller’s stake in the joint venture could add nearly 50% to Molson Coors’ earnings per share, besides allowing the company to cut nearly $400 million in costs.

Molson Coors currently carries a Zacks Rank #1 (Strong Buy).