Molson Coors Brewing Co. may have its eye on Europe, but the rating agencies are casting a critical eye on Molson and its latest deal.
Moody's Investors Services lowered its rating on Molson Coors Tuesday after the Denver-based brewer announced that it will spend $3.54 billion to buy StarBev and its nine breweries in Central and Eastern Europe.
The brewer is betting on a stronger future for the region after the economic crisis subsides in the European Union. But Fitch Ratings said that the company's entry to the developing markets won't pose much of a challenge to stronger European brewers such as Anheuser-Busch InBev, SABMiller PLC, Carlsberg Group and Heineken NV.
That's two of the three key rating agencies giving a lukewarm reception to the deal.
Moody's lowered its ratings of Coors Brewing Co., Molson Coors International LP and Molson Coors Capital Finance ULC to "Baa2" from "Baa1", dropping it a notch in investment-grade status. The rating outlook is "Stable."
Moody's said that StarBev will provide Molson Coors better growth opportunities than its current markets, where beer consumption is on the decline. As a result of the deal, it adds operations in the Czech Republic, the largest per capita beer consumption market in the world, as well as operations in Serbia, Croatia, Romania, Bulgaria, Hungary, Montenegro, Bosnia-Herzegovina and Slovakia.
While Molson Coors expects a revenue boost from these emerging markets, where StarBev has a strong market share, beer consumption in these places has been volatile during past recessions. So the higher growth comes with much greater risk.
Moody's also said that the deal increases the company's debt levels, but it expects the cash flow to bring that back down to more acceptable levels within a few years.
Fitch was less optimistic about the potential for Molson Coors.
The rating agency, which has a "BBB" investment-grade status rating on the company, said the deal does little to challenge the bigger European brewers. Anheuser-Busch InBev, Carlsberg and SABMiller have critical footholds in Russia and the Ukraine, Fitch said. And SABMiller and Heineken are the market leaders in several Central European countries.
While other companies could have stretched to make the StarBev acquisition, no one was more aggressive in its bid than Molson Coors, which Fitch says shows how strongly the company values the markets. Meanwhile, competitors such as Anheuser-Busch InBev and Heineken may be saving for more attractive acquisition opportunities in the future.
"The already good positions that leading global brewers already have in this part of the world, assisted often by ample marketing budgets, reassures Fitch that Molson Coors' entry into the region is not a game changer in terms of competitive pressure for European-based brewers," the agency said in a note Tuesday.
Shares of Molson Coors, whose products also include Miller Lite and Coors Lite, dropped $2.48, or 5.4 percent, to close at $43.18 Tuesday.
