MONTREAL - Molson Coors Brewing Company is looking to offset declining North American beer demand by acquiring leading Central and Eastern European beer maker StarBev for US$3.5 billion.

The deal will add nine breweries and 4,100 employees in several countries to Molson Coors, one of the biggest beer companies in the United States and Canada.

StarBev is a "strategically compelling" fit that will deliver growth over three to five years — as well as give Molson Coors access to the increasingly healthy Eastern European beer market, said Molson Coors CEO Peter Swinburn.

"We do believe we are buying in at the right moment," he said on a conference call.

Pointing to seven quarters of economic growth in the region that has outpaced the rest of Europe, Swinburn said regional beer consumption is expected to grow by two to three percentage points per year.

The deal will offer Molson Coors better growth opportunities especially in Czech Republic, the largest per capital beer consumption market in the world. But beer consumption in these new markets has been volatile in past recessions.

"They did suffer with the financial collapse but they have rebounded pretty well," Swinburn said.

Although flagship North American brands Coors Light and Molson Canadian will eventually make their way to Eastern Europe, Swinburn said the initial focus is on its premium UK-based Carling brand.

"We've had quite a bit of success with Carling in the Ukraine and we see no reason why that success can't be emulated in at least some of these markets."

StarBev is a market leader with Top 3 market positions in all of the nine countries.

Swinburn said the Central and Eastern European beer market is very attractive. Although per capita beer consumption is high in the Czech Republic, it is lower in other countries compared to Western Europe.

He said consumer demand will pick up as the economy improves and the middle class expands and purchases more of the alcoholic product.

With the deal, Molson Coors picks up 16 owned brands, including Staropramen, "a high-quality Czech beer from the heart of Golden Prague, the city with more than 1,000 years of brewing tradition."

The Czech beer could eventually find its way on to Canadian store shelves.

Molson Coors (NSYE:TAP, TSX:TPX.B) expects the deal will add to its earnings in the first full year of operations and result in $50 million of synergies by 2015, reflecting a combination of cost reductions and business growth.

"The transaction is strategically compelling, financially attractive and immediately transforms Molson Coors' growth profile," Swinburn told analysts.

The brewer's percentage of revenue from markets other than the U.S., Canada and Britain will increase from low single digits to 14 per cent, "a significant and healthy change," he added.

StarBev had sales totalling about US$1 billion last year and had US$322 million in profit, after adjustments.

Molson Coors is acquiring the business from CVC Capital Partners Ltd., a private equity firm that operates several funds that have owned StarBev since 2009.

StarBev chief executive Alain Beyens said he's happy the European beer maker will become part of one of the world's largest brewers.

But the acquisition received a less-than-frothy response by analysts and rating agencies.

Mark Swartzberg an analyst at Stifel Nicolaus said he's "not convinced this is a good transaction."

"The transaction diversifies Molson Coors into less developed markets, potentially aiding long-term growth ... but StarBev's EBITDA margin is 34 per cent, raising the question of whether margins are at peak levels," he wrote in a report.

He added that targeted growth likely requires faster capital outlays than earnings growth.

Moody's Investors Service lowered its ratings of Molson Coors subsidiaries one notch to Baa2 with a stable outlook.

"We believe that Molson Coors will face challenges as it integrates the StarBev businesses and navigates the management of a collection of markets that are at differing stages of development in terms of the maturity of each beer market," said Linda Montag, Moody's senior vice-president.

Moody's also said Molson's leverage will rise materially at the outset before being trimmed within two years.

Fitch Ratings said Molson Coors' entry into this region of Europe will have a limited challenge to other large brewers, which have already helped to consolidate the global beer industry.

While Anheuser-Bush, Heineken, Carlsberg and SABMiller have preferred to preserve their fire power for more strategic acquisitions, it said Molson Coors had a greater incentive for the deal.

Its markets are among the most mature in the world, with the U.S. volume declining for three years.

Fitch said Molson Coors' entry into the region "is not a game changer in terms of competitive pressure for European-based brewers."

The transaction is expected close in the second quarter of 2012, assuming it gets approvals from European competition authorities.

Following the close, StarBev will be operated as a separate business unit within Molson Coors and will be headquartered in the Czech Republic. It currently has headquarters in Amsterdam and Prague.

It has brewing operations in the Czech Republic, Serbia, Croatia, Romania, Bulgaria, Hungary, Montenegro and also conducts operations in Bosnia-Herzegovina and Slovakia.

Molson Coors shares closed at C$43.01 Tuesday on the Toronto Stock Exchange, down $2.49 or 5.5 per cent.

— With files from David Paddon.

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