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Ryan Lake Talks M&A Environment in Craft

Craft Business Daily:

M&A in beer this year has been one for the record books. How did it get to this point? Ryan Lake, director at First Beverage Group, reviewed that, as well as what to expect going forward at the Brewbound Session in San Diego yesterday.

THE RISE OF MULTIPLES. Looking back almost a decade, we see that from 2007-2013 EBITDA multiples were generally 6x-12x. In 2014, the multiples jumped significantly to a range of 10x-15x. This year they’ve “increased almost exponentially” to 12x-25x. To put that in context, the median craft beer multiple since 2007 is right around 12x-12.5x and the median multiple for all beer transactions globally was probably around 13x, according to Ryan. “So this last year has certainly seen a pretty significant increase above the median,” he said. The same can be said about revenue and price per barrel.

Ryan pointed out, however, that 2015 is of course skewed by the Ballast Point ($1 billion) and Lagunitas ($500 million) deals. He labeled these deals as “a bit of an anomaly.” In Lagunitas’s case, “Heineken clearly sees that as a global craft brand. I don’t know how many global craft brands there can be.”

Then, on Ballast Point, “the margins were incredible, the growth was incredible, and very few breweries can maintain those sort of metrics with their size.” He joked that the Ballast Point deal has made First Beverage’s job a little tougher. “We got a lot of clients that see that price and they want to get that,” he said.

Those deals may have something to do with this little factoid on California as well: Leading up to 2015, the state had little to no deals. Now there’s “more total transaction value in California than rest of the country combined.”

HOW DID VALUATIONS GET TO THIS POINT?  It’s due in large part to craft’s tremendous growth. “Craft beer just continues to grow and continues to grow every year even on a larger basis, which is pretty tough to do,” Ryan said.

Then you couple that with craft’s strong margins and you have investors licking their chops. “It’s not normal in a consumer product space to be small or mid-sized and have 40%-50% gross margins, 20%-30% EBITDA margins–that’s just not normal.”

And of course we’re seeing some of craft’s top brands in these transactions. “There’s a relative scarcity of high-quality scalable or scaled craft beer assets with good growth and good margins. So the brands and the breweries that have those sort of qualities are getting the highest valuations.”

SO WHAT ARE BUYERS LOOKING FOR? First, you have qualities that are important to everyone. This bucket includes “growth, high margins, quality product, good branding, excess capacity.” Then there are things that attract strategic buyers like distribution alignment and matching up with their portfolio. The financial world is more focused on bottom line profitability and near term CAPEX requirements, Ryan said.

SO WHAT DOES THE FUTURE HOLD? One thing Ryan knows for certain is, it ain’t over yet. He isn’t sure when the fever will stop, “but there’s a lot more deals coming for the medium-term at least.” Right now there’s still more buyers than sellers, but that may be changing, he said.

But a few things could impact the amount of deals we see in the future. First is whether craft’s growth can maintain this momentum. Ryan said the segment was growing faster than last year till about June, but has slowed since then. “So I don’t know what the end of the year holds, but if craft can maintain growth it will obviously keep the valuations high and the buyers interested.”

Another question mark is when the big strategic buyers will get a full stomach. Obviously, Ryan doesn’t know how many it will take to satiate their appetite, but “once those buyers are effectively out of the market the financial buyers won’t have to pay such high multiples to compete with those bidders.”

One other unknown is what will happen to breweries’ growth and margins with all the increased competition. Ryan said he’s already seeing a flood of money going into sales and marketing. “It’s kind of becoming a new fact of life that you have to spend more on salespeople and general marketing spend. And that’s going to affect margins.”

He wonders how consumers will perceive craft brewers and these deals going forward as well. He pointed to all the forums on Beer Advocate and its members, who are asking, ‘who is going to sell next?’ “So it’s kind of bled over into the consumer space,” Ryan said.

And finally, there’s the economy. “Nothing exists in a vacuum,” Ryan said. He noted that we’re fortunate to be “living in an age of very cheap debt” and core craft consumers are currently experiencing low unemployment and hold a pretty good disposable income. “If those things change no one knows how it will change the deal environment.”