Canada, Toronto: A major stakeholder of Molson Inc. has urged shareholders to vote against a merger with Adolph Coors Co., arguing that the deal to create the world's fifth-largest brewer by volume makes no sense, Reuters revealed on January 4. Burgundy senior vice-president David Vanderwood told Reuters on January 4 the key problem with the proposed merger is that it fails to recognize the gap in profit margins between the two companies. Vanderwood argues that Molson's five Canadian breweries earn almost four times as much money per hectoliter of beer as Coors does.

U.S.-based Coors and Canada's Molson agreed to merge last July, but the deal has faced opposition and has been amended several times in a bid to entice shareholders.

In a letter sent to shareholders, Burgundy said the proposed deal between the two brewers is flawed because it does not place enough value on Molson's profitable business in Canada. "We believe that Coors and Molson should go back to the drawing board to come up with a new formula, one that reflects Molson's superior economics," Burgundy said in the letter. Burgundy also claims that EBITDA (earnings before interest, taxes, depreciation and amortization) is "horribly misleading" because Molson's depreciation expense and its need for capital expenditures are far lower than Coors'.

The shareholder claims a more appropriate measure should be operating profit where Molson is valued at 10.3 times last year's operating profit, compared with 11.7 times for Coors. "If it proceeds under the last terms discussed, shareholders will have received another value-subtracting blow at least rivaling the one they suffered in Brazil," Burgundy said in the letter.

Molson did not return calls seeking comment on the Burgundy letter but did issue a release that said Fairvest, Canada's leading independent proxy advisory firm, recommended Molson shareholders vote in favor of the proposed merger with Coors. According to Molson, Fairvest performed an independent review of the deal that showed the implied merger valuation is well above most comparable transactions.

Also on Tuesday, January 4, Institutional Shareholder Services, a shareholder advisor group, recommended Coors shareholders vote for the merger. Coors said Institutional Shareholder Services backed the deal, saying Coors shareholders should gain from the improved scale, better mix of revenues and earnings as well as the financial benefits stemming from cost savings.

Molson and Coors will hold a shareholder meeting on Jan. 19 to vote on the proposed merger. If shareholders approve the proposed deal, final court approval will be sought on Jan. 21 with an expected closing date of Jan. 28.

Shares of Molson were off 28 Canadian cents at C$35.20 on the Toronto Stock Exchange, and Coors was down $1.28 at $74.09 in New York.

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