I trust many of you have seen the news from a few weeks back about SAB and Molson Coors’s joint venture – Miller Coors (for background see here and here).

I’ve been meaning to write about this deal for some time. When I first saw it, the structure of the transaction struck me as somewhat odd. Unfortunately, I got carried away doing some other things. Hope it isn’t too late to add my two cents (for the half-a-penny or so that they’re worth).

First, the fact that SAB was exploring strategic options for its Miller arm to begin with looks like an explicit admission of defeat. SAB never seemed able to extract value from Miller and was not able to make inroads in the U.S. in its battle against Anheuser-Busch. That Miller’s performance was not stellar under SAB’s ownership should not have been entirely surprising. It’s very difficult for firms to acquire and successfully run foreign businesses, and SAB was no exception. OK, that’s fine, the deal didn’t work out for SAB, so maybe consider selling it. That, to a certain extent, explains SAB’s motivation for wanting to divorce itself from Miller.

From Molson Coors’s perspective, I can see an interest in combining operations with Miller. Molson Coors is a distant third in the U.S. beer market – a market that is mature, and growing at an increasingly slow rate. Teaming up with the second largest American brand just makes sense. It allows the combined entity to enjoy greater pricing power, exploit operational and distributional synergies, and create a more formidable competitor vis-a-vis Anheuser-Busch.

For these reasons, this union didn’t shock me at all. Quite frankly, it even makes some strategic sense.

What did shock me, however, was how the deal was structured. As a joint venture???

In my opinion, this should have been an acquisition. Molson Coors should have acquired Miller, or alternatively, Miller should have been spun-off from SAB and then acquired Molson Coors. That the new entity (Miller Coors) was structured as 50/50 joint venture between the two parent firms (Molson Coors and SAB) didn’t make much sense to me.

Technically, Miller Coors is not a 50/50 joint venture. With respect to capitalization, it’s actually a 42/58 joint venture. SAB retains 58% of the rights to the residuals while Molson Coors’s contribution entitles it to 42% of the residuals. That said however, Molson Coors was able to command 50% of the decision-making power, effectively making it a 50/50 joint venture with respect to control and decision rights. Guess who’s management (in the form of intangible contribution to the deal) was more highly valued? Rhetorical question!

In my opinion, a joint venture between SAB and Molson Coors in which each shares equally in the decision rights will run into many conflicts, not unlike an acquisition that is billed as a "merger of equals" (see here for a description of problems associated with these types of mergers). Sharing power across firms in a joint venture can lead to conflicts over the appropriate way to go about running the new business, can result in delays in achieving synergies, can lead to greater staff defections, and can result in greater than necessary managerial costs. All this ultimately stands to hurt the performance of the new venture, and these kinds of deals can quickly devolve into an ugly power struggle between senior managers from two companies that don’t understand each other’s culture.

Because the potential for synergies, the opportunity for pricing power, and the ability to create a more formidable competitor vis-a-vis Anheuser-Busch are all so great between Miller and Coors, centralized ownership (with one firm and one set of managers calling the shots) would be a more effective way to achieve those benefits. I therefore have this uneasy feeling that "management problems" will plague this joint venture in the months and years to come.

But I’m still trying to figure out why this deal was ultimately structured as a JV and not an outright acquisition of one party by the other (e.g., Moslon Coors buys Miller from SAB, or SAB spins of Miller and later acquires Molson Coors). I’ve come up with several potential explanations. It could be a simple resource constraint story. That is, Molson Coors may have wanted to buy Miller, but either they did not have the money to do it (their balance sheet wasn’t strong enough) or liquidity has dried up in the market such that they couldn’t get the financing to underwrite it (as a result of the credit crunch). As an alternative, SAB could have acted as the bank, I guess, and provided Molson Coors the financing to get the deal done, but maybe they were unwilling to accept that risk. As for Miller buying Molson Coors, my guess is that a solution of that sort would have been unpalatable to the Coors family (which still controls a large portion of the voting rights of Molson Coors).

Anyhow, it’s too bad we won’t get to witness it (unless future plans are in the offing for Molson Coors to acquire Miller), because I think Miller and Coors could have made for a really interesting combination as an acquisition…

This entry was posted on Thursday, November 8th, 2007 at 8:12 am and is filed under Corporate Strategy, International Strategy. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.