Ettelman & Hochheiser, P.C.

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“THE LEGAL BUZZ”
MILLER & COORS: WHOSE CONSOLIDATION WILL IT BE?

Just when you thought it couldn’t get any hotter in October, SAB Miller and Molson Coors Brewing Company announced their joint venture in the U.S. market. If you recall a joint venture was the first step in the ultimate merger of Molson and Coors. There is no reason to believe that the joint venture between Miller and Coors will not result in a merger as well. Certainly, there have been rumblings and rumors about Miller and Coors merging for many years, dating back to the Miller/Coors “shared house” policy. Now, despite the abandonment of the shared house policy years ago it appears that Miller and Coors are finally ready to tie the knot. Obviously, there will be many power struggles and changes in the coming months as a result of the new venture both at the brewer level and at the distribution level. Miller and Coors have already announced a savings of $500 million as a result of synergies. Of course, when brewers start talking about “synergies” the “C” word is on their minds. There seems to be no serious doubt that the combined company will attempt to consolidate its wholesaler network. The real question is who will be the consolidators and who will be the consolidatees.

Alignment is out the window

When Coors took over the distribution of Molson products in the United States it was pretty clear who the targeted consolidatees were going to be - any Molson distributor that was not a Coors distributor. Similarly, when AB got the rights to the InBev brands no one thought for a second that a Becks/Bass/Stella distributor would be favored over the Bud house. And when SAB Miller acquired the McKenzie River products Sparks and Steel Reserve the “Dear John” letters did not go to the existing Miller wholesalers, they went to the wholesalers that had McKenzie River but not Miller.

The Miller/Coors deal creates a whole other beast. While Molson Coors was billed as a marriage of equals, here, you have what appears to be a true marriage of equals. Early reports are that while Miller will own more equity, Miller and Coors will have an equal say in the management of the joint venture. So the attempted consolidation of the wholesaler network will not be a simple matter of alignment as it has been previously with Molson-Coors. Ironically, there may be Miller wholesalers who have either been targeted for consolidation with respect to the Molson brands or who have actually been consolidated that may find themselves in the position of being the preferred wholesaler for the new Miller/Coors company. Just as many AB wholesalers sold off their InBev brands to become “A” wholesalers for A-B, only to repurchase those brands when A-B took over the distribution of InBev brands in the U.S., so too may “Molson only” wholesalers who are also Miller wholesalers find themselves in the purchaser’s seat instead of the seller’s. As I said to a few of our Molson only wholesalers whom Molson has been trying to consolidate since the 2003 Molson-Coors joint venture “the Molson/Coors bulls-eye is off your backs, now you have to convince Miller/Coors that you should be buyers and not sellers.” Whatever Miller Coors decides to do with respect to its distribution network two things are for sure. First, consolidation will not be based solely on a desire to align with either Miller or Coors distributors. Second, the existing Molson-Coors policy of strict alignment is out the window.

Who will be the Chosen?

It was easy to tell if you were going to be a target of consolidation for Molson/Coors or A-B/InBev. If you weren’t a Coors distributor or an A-B distributor, you were a target. With Miller Coors it will not be so easy. A long time ago, a highly ranking brewer executive told me that when it comes to consolidation, performance does not count. Shocking! How can performance not count? The thought process was that even it you are performing better now than your competition, if you don’t have the scale to compete long-term in the market, ultimately you will fail. Thus, bigger is better-even if current performance doesn’t exactly support the theory. Will that hold true with Miller-Coors? Will they simply seek out the largest distributor in each market? Possibly, but if history has taught the brewers anything, it should be that bigger is not always better, sometimes better is better. Given the fact that it is not likely that there will be tremendous differences in scale in most markets between either the Miller only wholesaler or the Coors only wholesaler, other factors will come into play. The most logical path for Miller Coors to take is to analyze each market independently and determine which wholesaler is best for the merged company. Many factors will necessarily go into the analysis such as scale, make up of portfolio, market share, infrastructure including number and size of warehouses, number of salespeople, number of trucks, management team, succession plans, and plant modernization. These are all fairly objective standards. However, not only objective matters will go into the mix. Certain subjective standards will be considered as well. Matters such as relationships with brewer management and representatives and reputation, in the industry will, no doubt, count as well.

So, all of you Miller only or Coors only wholesalers have a choice. You can either sit on your hands and let the “powers that be” dictate your future, or you can be proactive and try to steer your own course. For all of you captains, we recommend a four step process to provide you with the tools necessary to make the choices that may ultimately make the difference in the survival of your business.

Step 1. Analyze your market.

It is absolutely essential that you honestly and objectively assess your operations and compare your operations against those of your competitor. Know what your relative strengths and weaknesses are and to the extent you can, to take action to cure those weaknesses. What is your respective market share? What are the footprint issues in your territory? What are your respective volume? How much of the combined portfolio will each of you have? These are just some of the issues you have to drill down on in order to analyze whether you are likely to be asked to buy or to sell. The more thorough and honest the evaluation, the more ammunition you will ultimately have.

Step 2. Find out what the brands are worth and what your legal rights are with respect to maintaining the right to the brands.

This may surprise some of you, but just because a brewer wants you to sell or buy, you don’t have to. It may or may not be the right thing to do, but you always have alternatives. However, before you make any decision you absolutely, positively have to do two things. First, you need to know what your rights are vis-à-vis termination. If a brewer can terminate you without cause you obviously have a lot less bargaining power then if your distribution rights may not be terminated. That analysis includes a survey of the various state and federal laws that govern your relationship with the brewer (not just beer franchise statutes!) as well as a review of your distribution agreement.

Equally important to your ability to make an informed decision is understanding both the value and price of the brands that you will be asked to either buy or sell. You have all heard stories of wholesalers getting “X dollars per case” or “X times gross profit” but that does not have any real meaning when it comes to placing a value on your own brands. That is because value is always a function of one thing and one thing only - cash flow generated from the sale of the brand. Value is a measure of what the brand is worth to you. Price may be quite different than value for numerous reasons. However, it is important to understand the difference between value and the price you are likely to get in order to make a decision.

Step 3. Are you a buyer, a seller or a fighter?

Once you do your analysis you should have a fairly good idea as to whether Miller Coors sees you as a buyer or a seller. In any event, if their past practices as independent companies holds true whether you are wrong or right as to your assessment, they will let you know what their wishes are. Before you get “the call” you should first determine what your best case scenario is. Do you want to buy, sell or stand and fight? Perhaps you don’t want to take on the debt that will be necessary to buy your competitor’s brands. Perhaps you believe that it is a good time to sell. Perhaps your business can’t afford to lose the revenue and volume associated with a major brand. The reasons for buying, selling or standing pat will be as varied as the wholesalers themselves, but the bottom line is that if you make that decision up front, you will be in a far better position than if you play the “wait and see” game.

Step 4. What are my alternatives?

Once you make an informed decision as to your desire to buy/sell or fight, you then have the ability to put a strategy into place that will maximize your chances of achieving your goal. But what happens if steps one through three suggest that you should be a seller, but you don’t want to sell, or that you should be a buyer but you don’t want to buy? The key in these circumstances is to identify your situation as early in the process as possible and to implement a game plan that gives you the best chance of winning. For example, the Miller or Coors brands might be too important as part of your entire portfolio for you to sell and still have a viable business. If you believe you will be targeted as a seller, you can be proactive and seek alternatives to selling long before the “knock on the door” from Miller Coors ever comes. Such alternatives could include merging with another wholesaler (why should the brewers have all the fun!) selling your entire business, or acquiring another wholesaler. Certainly, if you come to the conclusion that your only alternative is to stand and fight, the earlier you start making your battle plans and squirreling away ammunition, the better off you will be.

The clouds may not yet be visible, but if you are either a Miller only or a Coors only house, the storm is coming. The choice is yours, you can either try to chart a course to avoid or minimize the impact of the storm and make sure you have necessary provisions ahead of time, or you can react once the storm hits. Any old sailor will tell you its better to be prepared. Indeed, you don’t get to be an old sailor unless you do prepare.