Source: MillerCoors Has the Capacity to Brew Pabst

FILED MAY 19, 2016

Dear Client:

Earlier this week we reported that MillerCoors has filed a Motion for Stay and to Compel Mediation in response to the Pabst lawsuit filed in Wisconsin circuit court for breaching their contract agreement that has been in place since 2007.

Recall that MillerCoors's reasons for stay included arguments that Pabst has skipped necessary processes, and their contract "expressly requires [mediation] before any litigation may commence." Further, it's up to MillerCoors to determine "at its sole discretion" whether it will have sufficient capacity to brew Pabst's brands "over and above" MillerCoors's other production. As MillerCoors maintains volumes have dropped 15% since 2008, it has determined its "production needs are best met with a re-sized brewing network" -- hence the Eden closing and MillerCoors determining it will not be able to produce Pabst brands between 2020 and 2025.

Agreement reportedly provides in this case that the parties "discuss possible solutions for capacity constraints," which may require Pabst to contribute financially. MillerCoors maintains that they have in fact proposed solutions, but "Pabst repeatedly asserted unreasonable interpretations of the Agreement that were inconsistent with its express terms and began threatening MillerCoors with litigation." On the allegation that MillerCoors hasn't provided Pabst with the information it needs, MillerCoors says it has provided some but doesn't have a contractual obligation to anyway.

There's also the issue of price hikes per barrel levied after years of supposedly brewing Pabst at below-market rates. Pabst alleged their $18.30 cost would be raised to $45, but MillerCoors contends it offered to lower that to $22 per barrel in a "good faith attempt to reach a solution" but Pabst "refused to offer any reasonable solutions of its own."

THE LATEST: PABST'S COUNTER VOLLEY. BBD has learned through its own channels that Pabst is mounting its own response to MillerCoors's recent filing.

A source close to Pabst tells us that though MillerCoors has tried to characterize the negotiations between Pabst and MillerCoors as the latter making concessions and the former rebuking until the filing, that's allegedly inaccurate.

A MillerCoors offer did come down during the process but it was significantly more than double Pabst's existing fee, the second one still more than double, but less so (re: per barrel fee). So effectively, MillerCoors must have allegedly known these were not solutions that Pabst could even entertain, says our source. And the way that MillerCoors determined said increase is disingenuous, per source: it uses irrelevant, incomparable costs of good sold to justify. As for idea that Pabst lowballed them on purchasing Eden -- au contraire, it was apparently, instead, quoted at an astronomical price, so far above market it was allegedly unacceptable. When Pabst asked for some justification on that cost, MillerCoors's response was reportedly no response.

Moreover, source says Pabst didn't jump the gun in filing, as their timeline in this matter is tight: They have until 2022 but the contract stated that negotiations were to take place last year because it's neither a simple nor quick task for Pabst to replace the some 5 million barrels that MillerCoors produces for them, and it will cost Pabst indeed to find a replacement.

And then you get down to some interesting math at the heart of the capacity issue, and agreement:- Per MillerCoors own public statements, in fact, they should have enough capacity to brew for Pabst.

Per MillerCoors's own publicly available information, per source, they brew 60.1 million barrels, including Pabst, for whom, again, they produce 5 million barrels. But they have 77 million barrels capacity. So, MillerCoors's ability to kick out Pabst is basically dependent on reducing their capacity to not be able to produce Pabst products beyond 2020. But that's not the intent of the agreement. To wit: Eden is 9 million barrels, and 77 minus 9 is still higher than 60.1. That begs the question: What else are they going to brew that makes it so that Pabst is out?

EUGENE: "MILLERCOORS LEAVES US NO CHOICE." We have inquired, and did get a statement from Pabst chairman and CEO, Eugene Kashper, on the matter: "MillerCoors' anticompetitive actions are a clear breach of our contract and have damaged a mutually beneficial 17-year relationship," he said. "Pabst Brewing Company is a fraction of the size of MillerCoors and its multinational owners, SAB Miller and Molson Coors. We would prefer to find an amicable solution rather than engage in a protracted legal battle, but MillerCoors' refusal to consider our numerous settlement proposals leaves us no choice.

"We are proud to be an independent American brewer, and refuse to be bullied by anyone looking to stifle competition through unjust means. We will fight to continue offering Pabst Blue Ribbon, Lone Star, Rainier, Old Style, Natty Boh, Stroh's, Stag, Old Milwaukee, and the rest of our portfolio of cherished American heritage brands at affordable prices to consumers across the country."

GOV. CUOMO ANNOUNCES DRAMATIC REWRITE TO NEW YORK'S ABC LAW

New York State is looking to completely revamp its Alcoholic Beverage Control Law, which has been in place since the repeal of prohibition.

Yesterday, Gov. Andrew Cuomo announced new legislation to modernize the 80-year-old law at a ribbon cutting ceremony at Three Heads Brewing in Rochester. The changes are mostly administrative.

Cuomo deemed the overhaul to be necessary as the current law creates a "tremendous obstacle for the wine, beer and cider industry." He has quite the disdain for the law calling it "the most bizarre, arcane, frustrating, maddening law that you could imagine." In sum, "this law has been impossible," said Cuomo.

Cuomo and company have tried to edit the law over "the last few years," but after their wine and beer summit this past year they came to the conclusion to just scrap it altogether.

"Let's just throw out the whole law and let's start over with a blank piece of paper because trying to fix this law is more work than writing a new law. Sometimes it's easier to tear down the house, than try to rebuild the house," Cuomo said of the time.

So what they've come up with is a dramatic rewrite of the law based off the recommendations from the alcohol industry task force put together in November.

Key amendments to the law include:

Expansion of Sunday sales: The new ABC law would allow bars and restaurants to serve alcohol before noon on Sundays.

A streamlined process for craft suppliers looking to dabble in other bev alc categories. Under current law, businesses that have multiple licenses are required to "file paperwork and renewals for each separate license." The new legislation "would combine craft manufacturing licenses into one application."

Authorize the Sale of Wine in Growlers. Enough said.

Reduce Fees for Craft Beverage Salespeople: "The ABC Law currently requires that any salesperson or solicitor employed by a manufacturer or wholesaler must obtain a solicitor's permit in addition to a bond." Cuomo's proposal "would reduce the fee for a solicitor's permit and eliminate the bond requirement."

Reduced Fees for Small Wholesalers: A number of small NY wholesalers "sell limited number of brands they import directly to large wholesalers for distribution to retailers." Currently, "these small wholesalers must pay the same amount for their license as their larger counterparts." The Governor wants instead "to create a low-cost 'importer's license' that would be available to wholesalers that sell only to other wholesalers."

Of course, nothing is set in stone just yet. The state legislature still has to approve the rewrite, which means Cuomo and company will have to move quickly with the legislative session ending in mid-June. He urged the legislature to get it done. "There is no excuse for the Legislature to leave Albany without changing this law," Cuomo concluded.

SABMILLER PRELIM RESULTS: TRANSACTION ODDS AND ENDS AND MORE

SABMiller has announced preliminary results the 12 months to March 31. Group beverage volumes were up 2%, with lager volumes up 1% and soft drinks volumes up 6%. Group NPR (net producer revenue) was up 5%, with group NPR per hectoliter growth of 3%. EBITA grew by 8%.

NORTH AMERICA HIGHLIGHTS. We just had MillerCoors Q1 earnings a couple of weeks ago, but SABMiller Senior Vice President, Internal & Investor Engagement Gary Leibowitz reviewed its full-year highlights to March 31 on a followup call for investors yesterday.

"In North America, group NPR was level with the prior year as MillerCoors shipments fell by 2%, primarily due to declines in the economy segment," Gary said. "NPR per hectoliter was up by 1% in a softer price environment with some continuing mix improvement." He noted that MillerCoors delivered a "significant performance improvement" in premium lights - though sales to retailers were down "low-single digits," MillerCoors consistently grew segment share. (Recall, the just-reported MillerCoors Q1 results saw depletions down 1.3%, and shipments were up that amount. On that call, MillerCoors also shared that STR volumes were down mid-single digits through April 23 partially due to the Easter holiday.)

ODDS AND ENDS: NOT EXPECTING A CLOSE BEFORE AUGUST 12. Back to larger SABMiller operations: Pressed on Q&A on wording about the potential ABI/SABMiller deal closing date, confirmed: as "echoed in the announcement published this morning," The "two parties to [the] transaction [are] not anticipating close prior to that date [August 12]."

CASTEL? Gary fielded a couple of questions related to the impending AB INBev transaction, including "whether Castel has given any feedback" on the matter? "None to us -- that would really be a matter [and] future between AB InBev and Castel," said Gary. (SAB and Castel have some partnerships in Africa.)

CHINA? Prompted on the China regulatory process, timing, and other comments pursuant to the impending tie-up, Gary said, "don't look for a document" on that: "We did not comment at all on the transaction there. We're simply not a party to it; neither AB InBev engagement with China Resources nor their approach directly or together to MOFCOM. ... We're just not a party to that."

COST IMPROVEMENTS RUNNING AHEAD OF SCHEDULE. Their cost saving initiatives are running ahead of schedule.

By the end of their 2016 financial year, they achieved net cumulative savings from their two cost saving initiative programs (the 2014-concluded Business Capability Program and their Cost and Efficiency program, which runs through 2020) of $1.043 billion U.S. dollars since the 2010 start. They announced the C&E program in May 2014, which now has a target run rate for cost savings of at least $1.05 billion U.S. dollars by March 31, 2020. They're ahead of schedule there, having delivered net annualized savings of $547 million by year end. The efficiencies/savings achieved were largely delivered from their "integrated, end to end supply chain."

"BREAKUP FEE." All the above from the U.S. investor call. But then was a call for London earlier in the day, during which time one caller resurrected that $3 billion "breakup fee." John Davidson, SABMiller general counsel, reminded listeners of those terms, set out in the Nov 11 announcement of transaction. "Essentially," he said, that fee's terms relates "to the obtaining of regulatory clearances and the approval by AB InBev shareholders. So. ... if ABI failed to achieve the regulatory clearances, then the deal have been completed as a result, then the fee is payable. And if AB InBev shareholders for some reason don't approve the deal, then the fee is payable."

ASAHI SNIFFING AROUND IN THE STATES

Asahi Group Holdings Ltd. is reportedly bringing its checkbook to the United States.

Bloomberg, who held an interview with the company yesterday, said the Tokyo-based company "is now pursuing deals in the U.S. that would help boost distribution of its Super Dry beer in the world's largest economy."

Asahi's president Akiyoshi Koji told the publication that the company "is willing to spend $3.7 billion starting next year" on further acquisitions. Recall that Asahi just recently shelled out $3 billion to take SABMiller's Peroni, Grolsch and Meantime brands off of Anheuser-Busch's hands.

"There's huge potential that our Super Dry beer will gain popularity in the U.S.," Asahi's president told Bloomberg. "The key is how to boost distribution power -- then we can think of bringing our whisky, Shochu spirit and non-alcoholic drinks later on too."

With SABMiller's European brands now in its portfolio and potential acquisitions in the US and Europe in the coming years, Asahi hopes to "boost the ratio of its overseas sales contribution to 20% by 2018, up from 15% currently," said Koji.

Until tomorrow, Harry

"Make sure you have finished speaking before your audience has finished listening." - Dorothy Sarnoff

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