| 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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