Did Labatt Guzzle Too Much Too Fast?

George S. Taylor, the dour CEO of John Labatt Ltd., was almost giddy when he announced plans last July to pay $510 million for a 22% stake in Mexican brewer Femsa Cerveza. After years of seeking growth beyond the flat Canadian beer market, Canada's second-largest brewer had cracked one of the world's most promising markets. "We have clearly positioned ourselves for growth," Taylor crowed. Paul A. Volcker, former Federal Reserve chairman, now of James D. Wolfensohn Inc., Labatt's investment banker, shared his exuberance. Volcker called the deal "a landmark transaction in the post-NAFTA environment."

Barely 10 months later, that landmark looks more like a land mine. With the collapse of the peso at the end of last year, Labatt says it will have to take a $219 million writedown on its Mexican investment in the fiscal year ended Apr. 30. And with the Mexican economy reeling, Taylor concedes the Femsa deal is likely to hurt Labatt's earnings for the next two years. Analyst Jacques Kavafian of Levesque Beaubien Geoffrion Inc. estimates that Labatt's net earnings will climb only 3% in the fiscal year that's just ended, to $118 million, as its revenues rise 35%, to $2.3 billion. And the financial fallout continues. The Canadian Bond Rating Service on Mar. 16 issued a "negative" outlook for the company's debt, after pointing out that the Mexican writedown would raise Labatt's debt-to-equity ratio to 58%, from 44%.