By Matthew Boyle

(FORTUNE Magazine) – WHILE RUMORS OF A POSSIBLE RIVAL bid threatened to upend the proposed merger of brewers Molson and Adolph Coors in early September, GOP Senate hopeful Pete Coors was busy munching on hot dogs with supporters in Loveland, Colo., the site of a new campaign office. Coors--who this year took a leave of absence to run for office but remains chairman--faces Democratic state attorney general Ken Salazar in a hotly contested race. But while the beer baron is kissing babies, the business his great-grandfather started is foundering.

Most of the attention in this particular skirmish has been paid to the civil war in the Molson clan. The merger, negotiated by chairman Eric Molson, who controls the voting stock, hinges on the approval of two-thirds of Molson's nonvoting shares. But some of those shareholders are not happy with the deal, first announced in July. They believe that Coors is getting control on the cheap--and instead are pushing for a possible rival offer for Molson being put together by Ian Molson (Eric's cousin and a former board member). That looks like a long shot, though, especially since Coors has a trump card. If another suitor prevails, Coors could force Molson to continue brewing Coors Light in Canada, but with most of the earnings (around $100 million annually) going to Coors.

That raises the question of whether Coors even needs Molson, given that they already have lucrative joint ventures. Both companies claim the marriage is necessary in a rapidly consolidating beer industry, but beyond some potential cost savings the rationale is flimsy. The merger "appears to be more about maintaining family business empires than maximizing value for shareholders," says David Hartley of investment bank First Associates.

Indeed, Coors's Canadian adventure may be proving a distraction from its biggest problem: the sorry state of its flagship brand. Coors Light makes up three-quarters of Coors's U.S. beer shipments, but its volume has been declining for the past 18 months, while its overall market share, currently 11%, has steadily eroded. If that keeps up, Coors Light could eventually cede the No. 3 spot in the U.S. beer market to Miller Lite, which has boosted sales by attracting carb-conscious beer drinkers.

True, overall growth has cooled off in the light-beer market, but Coors has made several missteps. In late 2001 the company decided to shift its focus toward twentysomething males, ditching its traditional core market--men ages 30 to 45--for a hipper crowd. The move has backfired, because young guys have been moving away from beer to spirits like vodka, according to senior vice president Brian Sudano of research firm Beverage Marketing. Coors also launched a low-carb beer called Aspen Edge earlier this year, but Anheuser-Busch's Michelob Ultra got there first, and consumers were reluctant to try an unfamiliar brand. Morgan Stanley analyst Bill Pecoriello says Coors's volume growth this year won't even keep pace with the sluggish U.S. beer industry.

So if Pete Coors wakes up a loser on Nov. 3, he might have an even bigger hangover awaiting him. -- Matthew Boyle