2007-02-01

Labatt's $201.4M Takeover Of Lakeport Could Inspire Further Discount Beer Buyouts

By DAVID FRIEND

TORONTO (CP) - The discount beer market could be in for a major shakeup after Lakeport Brewing Income Fund (TSX:TFR.UN) attracted a $201.4-million takeover bid from market leader Labatt Brewing Co.

Industry watchers said Thursday's deal could boost Labatt's competitive stance as it uses the smaller Hamilton-based brewer to build a commanding presence in the discount beer market, where Lakeport is a leading player.

David Hartley, a beverage analyst at Blackmont Capital, said the move has the potential to slowly change the way beer is sold in Canada.

The idea is to bring the pricing for the industry up as a whole, and this deal might do that over time, he said. There's an opportunity here for Labatt to trade drinkers up to higher-priced brands.

I think there's an attempt to kill off the discount category, but it won't be easy, Hartley added.

That may not go down well with beer buyers but it could be good news for the major brewers, who have struggled to turn a profit in recent years, while Lakeport posted record profits selling low-price suds in Ontario.

UBS Securities analyst Kaumil Gajrawala said with the addition of Lakeport, Labatt will again become the largest beer company in Canada, besting nearest competitor Molson Coors (TSX:TAP.B).

Molson and Labatt have for years jockeyed for the top spot in Canada's beer market.

Longer-term, we believe this could increase Molson's vulnerability to competition from discount brands, Gajrawala wrote in a note to investors.

Industry watchers are keeping their eye on Molson to see whether it makes a rival bid for Lakeport or explores the option of buying another smaller discount brewer like Waterloo, Ont.-based Brick Brewing Co. (TSX:BRB).

Brick shares rose more than 9.5 per cent Thursday, up 17 cents to $1.95, on speculation that a buyout could be in the works. Calgary-based Big Rock Brewery (TSX:BR.UN) saw its units climb 95 cents, or 6.6 per cent, to $15.26.

Molson refused to comment on whether it will make an offer for Lakeport or any other value brewer.

Michael Krestell, an analyst for M Partners Inc. said he doesn't think it's likely that Labatt will use this acquisition to boost prices in the discount beer market.

There are still other value beer brand competitors so it would be difficult for them to come off the floor pricing in a significant way, he said.

Krestell said there's still room for the value beers to expand their market, though it would be at a slower rate than in the past.

Discount beer holds about 37 per cent share of Canadian beer sales, he said, which means the country could still boost those numbers to the nearly 45 per cent share that is seen in the United States.

Canada's thriving discount beer segment was essentially created by Lakeport with its dollar-a-beer concept. The company holds about 12 per cent of Ontario's beer market, making it the province's third-largest brewer behind Labatt and Molson.

Today there are 34 value-priced brands sold in Ontario and owned by a variety of brewers, according to Lakeport estimates.

Whether the number of brands will be whittled away, or the selling price increased, remains to be seen.

Labatt spokesman Neil Sweeney refused to say whether the company will raise its discount label prices as part of the planned integration, adding that the company intends to keep working in the value-priced market.

We have seen the great job that (Lakeport chairwoman and CEO Teresa Cascioli) and Lakeport did in growing their brands. We think we can grow these brands even further using our power as a growing brewer and our sales and marketing expertise, Sweeney said.

The deal with Labatt, a major Canadian brewer owned by Belgian giant InBev, is worth $28 cash per unit for all of Lakeport's units.

The company's board of trustees has recommended unanimously that unitholders accept the offer. The deal must also receive approval from the Competition Bureau.

Both companies said they hope the transaction will be completed in the spring.

The Lakeport fund's planned sale comes after Finance Minister Jim Flaherty announced on Oct. 31, 2006 that income trusts would be hit with a tax that would rest on investors.

Cascioli said the new tax policy didn't influence the sale.

We looked at the merits of the offer unto itself, she said. I've learned that you can't make decisions based on current legislation. You can take that into consideration, but it shouldn't be the deciding factor in things.

According to Thomson Financial, Cascioli holds about 25 per cent in the company, which means she would get about $40 million from the deal.

The deal opens a new chapter on the dramatic growth of cheap beer. The industry started with a few small players who saw a way to profit from the rising cost of mainstream brands and the concept quickly caught on.

Soon big-name competitors moved into the market in an effort to keep customers from migrating to low-cost beers, though their efforts had mixed success.

In 2005, Labatt introduced its Genuine Honey brand to compete directly with Lakeport's Honey Lager, selling it at $25 for a case of 24.

Rival Molson Coors has a wide line of brands that are considered discount, including Bohemian and the Carling Black Label.

Despite strong advertising campaigns from the companies, Lakeport managed to hold its own with a small business that produces nine beer brands and employs 200 people.

In the third quarter ended Sept. 30, the company posted gross sales of $50.1 million, up 27.6 per cent from $39.2 million a year earlier.

Hartley said one of the challenges facing Labatt is holding on to loyal Lakeport drinkers, whom he characterizes as believers in the brewer as an underdog, the little company that could.

Lakeport was one of the few remaining breweries in Canada that hadn't teamed with international beermakers. Last year, premium beer maker Sleeman Breweries (TSX:ALE) was bought by Japan's Sapporo.

Molson Coors was formed by the merger of Montreal-based Molson and U.S.-based Adolph Coors and Labatt, at one time Canada's leading beer company, is a subsidiary of InBev.

Stock in Lakeport closed up $7.35 to $27.92 on the Toronto Stock Exchange.

Used with permission from The Hamilton Spectator, www.thespec.com Copyright The Hamilton Spectator. All rights reserved.