SABMiller teams up with brewing rival Molson Coors

SABMiller, the FTSE 100 brewing company, is to combine its US beer business with its closest rival, Molson Coors, to create an industry giant able to take on the mighty Budweiser.

As Anheuser-Busch, the company behind Bud, continues to dominate an increasingly competitive US market, SABMiller said it hoped its new joint venture would be able to brew and ship its Miller and Coors beers more cheaply. The combined group will produce 69 million barrels of beer a year, and the merger should free up $500m a year in cost savings, executives believe.

SABMiller's US business – primarily the Miller portfolio acquired by the old South African Breweries in 2002 – has struggled since a price war launched by Anheuser-Busch, and pre-tax earnings in the division were down 17 per cent last year. Miller is stronger in the Mid-West and Molson Coors on the East and West coasts, but their combined market share of 30 per cent is still some 20 points behind Anheuser-Busch, and the beer market is under pressure.

"This transaction is driven by the profound changes in the US alcohol beverage industry that are confronting both of our companies with new challenges," said Pete Coors, vice-chairman of Molson Coors. "Consumers are broadening their tastes and are increasingly looking for greater choice and differentiation; wine and spirits companies are encroaching on traditional beer occasions; and global beer importers and craft brewers are taking a larger share of volume and profit growth."

The historic beer companies that came together to form Molson Coors in 2005 trace their roots to North American immigrants. They were founded by the German Adolph Coors, who came to the US in 1873, and John Molson, who had arrived in Canada from England a century earlier. Descendents of the two men still control the company through special voting shares, and Pete Coors is to be non-executive chairman of the new joint venture.

The brewing industry has been buzzing with rum-ours of consolidation for months, and some investors had bet on a full-scale merger of SABMiller and Molson Coors, but SAB's chief executive Graham Mackay signalled that the families behind the US company had been opposed to that idea. The families "wanted to remain fully invested" in the brewing industry, Mr Mackay said. The agreement announced yesterday includes a promise that neither company will make a bid for the other in the next 10 years.

Instead, the two companies will remain competitors outside the US. The joint venture, MillerCoors, which has annual sales of $6.6bn, will be 50-50 controlled by each company, although because Miller's business is slightly bigger SABMiller will claim 58 per cent of the profits.

Sam Hart, analyst at Charles Stanley, described the US merger as "primarily defensive", but no less positive for that. "High exposure to domestic and economy beer brands mean both SABMiller and Molson Coors have suffered as consumption trends have moved towards premium and imported brands," he told clients. "The US has been one of the main concerns surrounding SABMiller in recent years, and this goes some way towards addressing it."

SABMiller shares jumped 21p to 1487p in London trading.