Market Woes
                                          by Christina Hollings


Everyone who follows the craft brewing business accepts that the market is oversaturated —
not every craft brewer is going to succeed in a world where the number of American breweries
is higher than ever. It’s also common knowledge to this crowd that the last year brought an
unprecedented number of mergers, acquisitions and private-equity purchases.

Sure, each time a craft brewery sells to a private equity firm — an event that’s happened twice
already this year with the sale of Victory Brewing and Cigar City Brewing — critics insist on the
malevolent intentions of the investment firm. Despite promises to preserve the management
and employee base, culture and quality of its investment, said firm will do whatever it takes to
raise the value of the brewery before selling it off to an even more distant and soulless entity
hellbent on global beer domination.

So if you’re someone who doesn’t pay attention to financial news, pay attention to this. Despite
what you might have believed, Private Equity investors aren’t satisfied to collect off annual
profits. A traditional private-equity fund, which pools money from wealthy individual and
institutional investors to take equity stakes in companies, has a finite lifespan of usually 10
years. When that fund sunsets, investors expect to get paid out. A lot.

What does this mean for the industry? Of the more than half-dozen high-profile equity deals
that have taken place recently, most of the PE firms will look to exit three to five years
afterward, launching a rash of the resales and public offerings that the craft community so
derides. If a profitable exit doesn’t look possible, the firm may hold longer, but something has to
happen by the end of the fund’s 10-year lifespan, or in some cases a few years afterward if it
gets an extension from investors.

-Here are some likely secondary market scenarios several of which craft beer fans will deplore.
IPO:
Because it takes an exhaustive amount of capital to take a company public, only about five
major existing craft and former craft breweries and collectives have done it: Boston Beer;
Mendocino Brewing; Appalachian Mountain Brewery; Craft Brewers Alliance, partially owned by
AB InBev (Redhook, Widmer Brothers, Kona); and North American Breweries (Pyramid, Magic
Hat), whose PE firm sold it to a food and beverage conglomerate in Costa Rica two years after
buying it. But it is an option, albeit one that sends a strong anti-artisanal message to
customers, especially when the word “shareholder” starts getting tossed around.

Resale to a larger brewery:
These transactions are generally the most common, and we’ve seen international brewers like
Anheuser-Busch InBev , Constellation Brands, Heineken, MillerCoors’ Tenth and Blake
division, and even Duvel Moortgaat display an appetite for gobbling up smaller competitors. As
PE firms bolster the value of their brewery investments, expect to see these corporations enter
the secondary market as buyers. These buyout transactions are often disapproved of by
industry insiders and enthusiasts, who criticize them for tarnishing a brand’s local credibility,
imposing ‘big corporate’ culture, and leading to sacrificed quality.

Sale to other craft breweries:
We’ve seen this in the Victory and Cigar City deals. Both Southern Tier and Oskar Blues
partnered with family offices to fund the purchase of other craft breweries. In what might be the
most ideal scenario, management stays in place and holds seats on the board while benefiting
from streamlined administrative systems and shared knowledge between relatively equal
partners. Again, with family office financing, there is no term limit, which brings it as close as
possible to guaranteeing that everyone’s in it together for the long haul.

Of course, any talk of capital infusions into craft brewing makes brewers from the 1990s
shudder. Unprecedented interest from outside investors and a rush for some companies to
prematurely go public brought about a shakeout that shuttered around 200 businesses.

Employee Stock Ownership Plan (ESOP):
A firm may choose to send the company back to its employees, as could be the case when Full
Sail’s partnership with Encore Consumer Capital ends. Last year, the Oregon brewery’s
employees, who’d held a controlling interest in their company since 1999, voted to turn their
equity over to Encore. Going back to an ESOP may be considered the “feel-good” option,
though it generally results in a lower sale price, because there’s no competitive bidding, and a
delayed liquidity event, considering that Leingang says most banks don’t want to finance the
entire transaction.

However a partial ESOP may be the new frontier for craft beer and an untapped structure for
craft beer liquidity. This arrangement would transfer part of the equity to employees while
selling the rest to a third party. He says this type of deal has potential to accelerate the cash
event for sellers and make traditional sales more palatable to the industry by ensuring local
ownership and protecting craft beer’s culture.

It's fair to say that craft beer should be wary of the pitfalls inherent in its phenomenal growth.
The invertible shakeup in the industry has many possible outcomes.  Let's hope that whatever
the result the independent spirit of artesian craftsman will continue to flourish in the industry.


Finally for those who deny  the basic assumption that the market is truly saturated then none of
this should concern you.  In that case I would like to interest you in buying a bridge in Brooklyn.
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