M&A Will Stay Robust: Another 25-30 Deals Likely in 2017; New Buyers, Creative Structures Comin’; “Anxiety” Effects

Craft Brew News:

2016 will go down as 2d consecutive year of exceptionally robust M&A activity in the craft beer biz, with another 25-30 deals likely by year-end (already about that much by our count). And it ain’t slowin’ down yet. “I think it will be as robust” in 2017, said First Beverage Group’s Bill Anderson on panel during California Beer and Beverage Distributors (CBBD) annual mtg; meaning “I think there will be 25-30 in this next period…. Obviously it can’t go on forever at that clip,” but “there are still a number of jewels out there that are showing very strong growth” and “as long as there’s this much change and disruption and innovation I think you’ll continue to see the M&A cycle be very healthy.” Gotta note, Bill is 2 for 2 in predicting the deal landscape in consecutive years, so he’s got a pretty good track record and a very direct line of sight into both the buyer and seller universe with First Beverage.

Interestingly, craft segment’s overall slowdown in growth has “affected the M&A landscape in marked ways just in the last 6 months,” Bill thought. There’s “quite a bit of anxiety on the seller’s side,” that’s “generating more discussions,” and “now buyers are taking their time, they’re getting more picky and they’re negotiating harder.” So valuations are “start[ing] to dip; you are seeing processes take longer; and you’re seeing a reshuffling of the buyer universe” as “some of the bigger strategics” are getting closer to “their fill.” But that’s not to say it’s shifted completely to a buyer’s market. Valuations on avg still in the 15-20X EBITDA range compared to up to 25X previously. In “any other category you could think about,” that’s still very healthy. Ballast Point “was clearly the peak in this cycle,” and tho “we may come back to that someday,” brewers now have to “get Ballast Point out of their head” and “be realistic” about their value, he advised.

New “Wave” of Buyers Comin’; Intl Buyers Interested in “Investments of Scale”; PE “Waiting for Their Moment” There’s “a wave” of new “buyers and investors that’ve yet to come into the US market,” and have “waited on the sidelines” up to this point. Both AB and MC have clear, “deliberate” strategy for “key regions” where they either “needed to be” or “where their core brands were not succeeding,” but both getting closer to their fill, Bill thought. So other domestic strategic buyers like North American Breweries (owned by FIFCO) and Pabst, as well as Constellation and Heineken likely to strike deals again (at some point). And “there are several more European brewers beyond just Mahou and Duvel,” as well as Asian brewers, “that are certainly looking.” International buyers are lookin’ “to make investments of scale,” which is why “many” were interested in New Belgium “when they were going through their process”; not a 20K-bbl brewer, but “a craft brewery of size that would make a big difference to a non-US brewer coming into the US marketplace.”

Then too, there are still plenty more private equity firms that have been “waiting for their moment” to enter biz. In fact, First Bev recently heard from another firm that was lookin’ at 3 different craft brewers, Bill shared. Since PE “couldn’t compete with the big strategics on valuations” and “not really bringing much to the equation” in terms of “efficiencies,” they’ve been waiting it out. But there are already “more…than I would’ve imagined” in the biz, he said, referencing Dogfish and Stone as particularly unexpected candidates that have formed PE partnerships. “I think private equity gets hit with the label that they’re short term holders,” with 3-7 yr investment windows, “but that’s not the case for all.” That’s one of the reasons why family offices are “so appealing: they think of their money as sort of 30- and 40- and 50-year money,” and typically “don’t have any outside shareholders.”

More Craft on Craft Deals; Spirits on Craft? “I think we’ll see more craft on craft deals” too, Bill stated. Previously “there wasn’t much in the way of M&A DNA on the teams of these craft breweries,” he reiterated, and they were “busy” with “own portfolio[s].” But “I think that’s changing now.” They “see this as a way to bolster growth and re-energize the culture,” and it “may be that they’ll pursue the same strategy” as ABI, i.e. “going to the markets where their core brands are weak and picking up a very exciting, vibrant high growth brand.” Gotta note, this year we’ve seen Lagunitas emerge with a clear M&A strategy, Stone’s formation of True Craft, continuation of Oskar Blues/Fireman Capital and Artisanal Beverage Ventures (Southern Tier & Victory), additional deals fueled by PE $$ and several tiny craft on craft deals in various states. Previously, Craft Brew Alliance, Green Flash/Alpine, Boston Beer’s Alchemy & Science unit, and Long Trail/Fulham Group (Otter Creek, Shed) were some of main examples of craft on craft M&A in US. Interestingly, Bill hasn’t seen non-alc cos lookin’ to come into the space, but “we’ve seen spirit companies looking at craft breweries,” Bill acknowledged during Q&A. “You’ll continue to see some confluence of spirits and beer buyers,” he thought, pointing to several craft brewers that have already started spirits lines and the similarities between craft beer and craft spirits. And for cider, “I don’t think it’s going to be a vibrant area for M&A activity,” but could see a handful that do deals over the next 3-4 yrs (recently Seattle Cider Co sold to Agrial).

Expect More Creative Deal Structures for Minority Stakes; Path to Control Approach“There is no set path” to what the “structure” of these next wave of deals will look like. But “I do think the minority investment idea clearly below the BA guidelines is a smart one,” said Bill, specifically referencing recent Kirin/Brooklyn deal. “I think you’re going to see it across the board”: most strategics want 100% to “bring all of their synergies.” But “family offices, Private Equity firms and international brewers will be much more creative in looking at minority investments.” Some of these “may have a path to full control, and that’s a very smart approach,” he added, since brewers “can take quite a bit of money off the table at a healthy valuation, have the resources and support of a large partner,” and “can space out the time period from investment to exit” over longer period of time.