BREAKINGVIEWS-Fevertree’s Molson Coors brew tastes bittersweet

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Jennifer Johnson

LONDON, Jan 30 (Reuters Breakingviews) - The world’s biggest brewers think nothing sounds better than a soft drink. Denmark’s Carlsberg CARLb.CO bought Britvic in July, and now Molson Coors TAP.N has gained the exclusive rights to produce and sell Fevertree FEVR.L mixers in the U.S., along with an 8.5% stake. For the $1.2 billion UK group’s shareholders, it’s a drink that will take some time to digest.

There’s good reason big brewers like soft drinks. Drinkers in some key markets have cut back on beer consumption and switched to spirits – while some have sworn off booze altogether. For the $10.8 bln Molson Coors, a relatively small outlay gives it an immediate access to a strong brand: Fevertree is already the number one player in the U.S. tonic and ginger beer categories.

Despite its cache, life has been tough for Fevertree. Its own shares have lost more than 60% in the past three years due to rising costs and slowing growth rates in traditional markets, like the UK. Having a drink with the Blue Moon maker could potentially solve many problems. It could sell its wares in a wider variety of locations, like petrol stations, thanks to Molson Coors’ distribution network. The companies have established a profit-sharing agreement, which guarantees Fevertree an undisclosed proportion of annual profits from 2026-2030 – so it looks like a low-risk way to expand into its fastest growing market.

That said, investors may have to be patient. Both parties have committed to “substantial” marketing investment in the initial years of their partnership, which will suppress margins. Jefferies analysts are now expecting EBITDA of 90 million pounds by 2028, up from 31 million pounds in 2023. Still, that’s only a 12.5% bump from analysts’ estimates of 80 million pounds for 2028 before the deal was announced, according to LSEG data.

News of the deal sent Fevertree shares up by over a fifth on Thursday. That may, in part, reflect hopes that Molson Coors could one day buy the rest of the shares. The snag is that any other rival brewer will be wary of tabling an offer, making a premium takeout arguably less likely in the near term. Fevertree’s concoction may yet deliver a pleasant return, but like its drinks, it will have to be enjoyed slowly.

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CONTEXT NEWS

Fevertree Drinks has granted Molson Coors exclusive rights to market its tonic waters and other mixers in the U.S. The beermaker also purchased an 8.5% stake, worth 71 million pounds ($88 million), in the London-listed company – making it the second-largest shareholder.

Shares in Fevertree climbed as much as 24% after the deal was announced on Jan. 30. The group told investors to expect low single-digit revenue growth and a short-term EBITDA reduction in 2025, with “sustained uplift in group revenue and EBITDA growth” in the medium term.