Beer Marketer’s Insights:
Deal environment in craft – whether it’s acquisitions, private equity investments, ESOPs, roll-ups, you name it – will be “frothy” for another 2-3 yrs, predicted First Beverage founder Bill Anderson at Beer INSIGHTS Spring Conference yesterday. (First Bev was advisor on several craft deals.) May become even more intense over next 18-24 mos. Indeed, Bill expects there could “easily” be 25 transactions in next 12-15 mos and ultimately upwards of 40-50 craft brewers may sell or take an investment. Why so much activity? Lotsa reasons, but “there’s a ton of money on the sidelines that wants to come in,” combined with increased interest among craft brewers to take that money. While craft beer phenomenon on consumer level unlikely to change much, in Bill’s view, all this money and all these deals will “radically change” nature of the craft business.
He likened earlier craft atmosphere to “a great little neighborhood” created by craft founders which held “friendly street barbecues” and they could pretty much predict how other people in the industry would react. But lotsa new players with that “ton of new money,” have “different motivations.” Like “building McMansions.” They want to come to the barbecue, “but they’re not bringing anything. They just want to eat your food.” So there’s now “a ‘there goes the neighborhood’ moment.” Again, while consumers may not notice all this change, biz of craft likely to become “less collegial, less predictable” going forward, Bill believes.
Lotsa reasons why craft biz so attractive to different investors right now. Those investors include “domestic strategic buyers” like AB, MC and Pabst, foreign strategic buyers (think Spain’s Mahou and its Founders deal), private equity, family offices and more. What’s not happened much yet: a lot of “craft on craft” deals. That’s in part because most craft brewers “don’t have a lot of M&A DNA on their team” and they’re busy trying to manage/ build their own bizzes. First Bev’s deals usually take 7-10 mos, said Bill. Since for many craft brewers it’s their first transaction, it takes time and a lot of work “getting them comfortable around the process.” Key reasons for current flurry of activity:
- “Nothing like the craft beer space” out there. It’s not only “hottest category” in bevs, but possibly hottest in CPG land, Bill suggested.
- A “wide deep pool of potential buyers that’s increased markedly in the last 6 months” (see above).
- Younger craft brewers found success more quickly than early pioneers, know they can make a lot of money and are not as attached to “the legacy piece” of the movement. Then too, younger owners “not as concerned about the optics of selling out and selling out fast.”
- “Smart strategic” buyers can find “smaller niche brands that don’t have complicated distributor networks,” avoid footprint issues and “layer” them into current systems. (Think AB’s purchases, even while it’s in legal dispute with NJ distrib over its refusal to give up/sell brands AB acquired.)
- Craft is “huge attraction” for private equity, even tho most PE firms don’t like bizzes with high cap ex requirements. But they see growth rates not available elsewhere, a “leaky bucket” of mainstream beer (“dollars spilling out” of AB and MC) that will feed that growth, plus it’s a fun biz. “Not many other categories are this attractive.” Then too, earlier perception that craft brewers would not take PE money “has broken.” And “family office” models of PE offer attraction of longer term investment approach. The numbers are good. Craft brewers are “very profitable businesses” with very attractive margins, and smart PE players see they can create even stronger results with a mix of the craft brewer’s talent and “big company expertise.”
- Global brewers want “diversification,” a US “beachhead” and US brands to sell in their mkts. And foreign brewers have their own legacies in their own countries to build on.
Even while Bill sees frothy near term for craft deals, he does think “the music will stop” eventually. And there are some pitfalls and risks in deal landscape. While this “first cycle” of craft brewers starting to sell and trade will drive lotsa action over next 24-36 mos, music will eventually stop as “the most aggressive buyer will have its number met” (AB). Also, PE firms won’t buy 10 brewers because they can’t concentrate their money so much in a single industry, so more like 2-3 and “they will be done.” What about the “roll up” strategy reportedly contemplated by Fireman Capital/Oskar Blues and Rich Doyle’s Enjoy Beer LLC, plus a handful of others? Some of those roll up programs view an IPO as “potential exit strategy,” Bill suggests. Some will work, some will fail, as some may “pay high multiples to get in” that won’t really pay out. Finally, there is risk that acquired craft brewers will “lose authenticity,” and new players will do “unpredictable things” (i.e. discounting), that can change nature of biz. Indeed, elsewhere at INSIGHTS Seminar and in lotsa conversations in recent mos, this deal activity – along with recent AB pricing actions – has spread concern about threatening craft’s current healthy pricing architecture.
While a number of craft brewers have gone ESOP route, Bill pointed to pluses and minuses. Some of the ESOPs may have used growth projections that are “hopeful,” he suggested, and resulting debt loads could be a burden. ESOP trustees tend not to “accelerate new ideas” that PE firms might bring and the structure “complicates decision-making.” On other hand, ESOPs allow founders to retain more control, they’re “more in sync” with craft legacy of a founder like NBB’s Kim Jordan, “democratize ownership” and have tax advantages. Debt isn’t only an issue for ESOPs. No craft brewers wants to be “laden down with debt” now, which makes it tuffer to expand geographically or invest in current brands, even as competitors are getting “fresh capital.”
Net-net: right now is a “unique window of very high multiples and very able, willing, hungry buyers.” Such an environment may not happen for another 8-10 yrs, Bill thinks. Ladies and gentlemen, take your meetings….