Southern Tier Partners with Private Equity Hires Ex-Pabst Exec

FILED SEPTEMBER 19, 2014

Dear Client:

Lots of deals coming down the pike, though more have been private equity (see Utah craft brewers' private equity solutions over the past year and a half), private buy-outs (Duvel Moortgat on Boulevard) and creative solutions (see Harpoon, New Belgium ESOPS) than the long-threatened big brewer buyouts (although stay tuned on that front). Now, we've just learned that upstate New York's Southern Tier, maker of popular pumpkin beer, Pumking, has struck a deal with New York City based investment firm, Ulysses Management LLC. The investment is subject to licensing approval. First Beverage Group acted as advisor to Southern Tier.

According to official announcement scheduled to hit today, the partnership "will support the continued expansion of the brewery, new distribution support, sales force growth, and enhanced branding and marketing initiatives." Monetary details were not disclosed.

And that's not all. The brewer has also hired Pabst and A-B alum John Coleman as CEO, effective Monday. He's former president and COO of Pabst, and was SVP Sales, Western Region A-B prior to that. "Most recently, John has been working with craft distillery brands to develop new paths to market and facilitate distribution relationships," per release.

THE BREWERY. Southern Tier is a hot craft brewer. The 11-year-old brewer claims average annual volume growth of 48% since inception. This year they're up 40%.

In the Brewers Association's latest Top 50 Craft Brewers list (for the 2013 year), the brewer jumped from 37 to 31. They plan to do more than 100,000 barrels in 2014. An $8 million expansion in 2012 tripled their capacity to 150,000-barrel runroom.

And they're branching out beyond beer: Last month they launched the DeMunck's Hard Cider brand, and will be opening a sister craft distillery in 2015.

BBD caught up with Southern Tier co-founder Phin DeMink on the haps. Why this investment firm, why now?

"The decision was made to bring in a partner so that we had the right resources to continue to grow the brewery," said Phin. "I plan on staying every bit involved as I've always been."

A strategic buyer might not have been a good fit. "When we even considered looking at partners, we had a very detailed criteria," Phin told BBD. That included an entity with a "long-term perspective" on things.

"When we met Ulysses, we were really impressed that they were a New York-based, small family office ... as we started talking to them, we were aligned on multiple things. They're passionate about craft, they understand craft, they understand small business and who we are, and the things important and near and dear to us." (Their private equity arm boasts "a wide variety of industries around the globe, in companies that can range in enterprise value from micro cap to in excess of $1 billion," per site.)

So where will they put their investment to work first? "I think probably the first areas we're going to start looking at heavily is building up our sales force, working with our wholesalers, really focusing on that end of the business, which is also why we decided to bring on John Coleman," said Phin.

Phin called John "a beer guy through and through who's won the respect of distributors and retailers around the country over his many years in the industry with hard work, integrity and a spirit of partnership. This will allow me to focus on what I love best - making beer and innovating."

YTD TRENDS. Big pumpkin fall play Pumking is up "pretty big this year," Phin said. "This was the first year that we were ahead of the game and we were able to execute all of our distribution plans very strategically. So I think that had a lot to do with it." But flagships IPA and 2XIPA are still growing too, "especially in our core markets."

As for the new cider, which seemed "the most logical way" to get into the gluten-free deal, they're just starting to ramp it up. "We're kinda keeping it limited for time being," Phin said, though "in 2015 we'll probably be offering it to more of our wholesale partners."

But don't expect them to open a whole slew of markets. "We really want to work with our current wholesalers and strengthen our position with them, really dig in and find out what they're looking for and really help kind of develop some further resources," Phin said. "Even in our core markets, I feel like we're still just kind of scratching the surface."

For their part, Ulysses Management managing director Paul Barnett said they're "honored that Phin and [co-founder Sara DeMink] have chosen to partner with us. ... We have deep respect for the grass-roots origin ´┐╝of craft beer and how it's been able to transform the beer industry for the better. This is part of a fundamental revolution towards authenticity in what people consume and we feel a great affinity for the movement both personally and professionally. Southern Tier will remain a proudly independent leading craft brewer while benefitting from the tools and resources of a larger organization."

First Beverage Group, which seems to be making quite a nice business of advising craft players lately, said they were "extremely happy for all the parties involved and were honored to be a part of it," per managing partner Townsend Zielbold.

IF THAT AIN'T COUNTRY... GROKKING KENTUCKY

Brewers, distributors and retailers... liquor, wine and beer... seems like everyone is against A-B's attempt to purchase distributor in Owensboro, KY. Everyone except A-B, that is.

BBD has done some digging and started reading the many, many, many pages (hundreds of pages) of opposition. Admittedly, we still have many more documents to plow through, but a few protest letters caught our eye right off the bat - those being from small brewers who are arguing that ABI would be detrimental to their access to market.

Yuengling's COO Dave Casanelli wrote opposing ABI's attempted purchase. He pointed to the fact that Yuengling is not currently in KY but retailers and consumers are asking for it (clamoring for it, some would say). Dave says it's not unlike what we saw happen in OH a few years ago. Dave claims ABI owning a distributorship could influence Yuengling's decision to expand to Kentucky. He notes that Yuengling has "always supported the independent beer distributors as the most efficient and appropriate means to access consumers and satisfy their demands." He continues saying, "by allowing the largest global brewer and our largest competitor to grow and expand their control of the middle tier distribution system, it would essentially eliminate one of the two major distribution systems that provides access to consumers and most likely limit our choice to the single remaining system."

But it's not just the "big craft" complaining. There's also a local KY craft brewer who's raising a stink. After all, it doesn't get more local than a brewery named "Country Boy" now does it? In its letter, Country Boy explains that it has "high hopes that our beer will be welcome in as many independent beer distributors as we can persuade of the value of our products." But then comes the one-two punch. "The notion that a massive multi-national brewer such as Anheuser-Busch would be allowed to grow its distribution network in Kentucky gives Country Boy and some concern." They point out that the loss of competition and market access could be devastating to a craft brewer.

And let's add one more to the pile. As the Brewers Association has pointed out on its website, the Kentucky Guild of Brewers is also trying to stop this deal - suggesting that the KGB has the blessing of BA to oppose ABI's purchase, although it's not explicit. The KGB flat out says that craft brewers are dependent on independent beer distributors to get to market... and ultimately to consumers. They write, "Smaller, independent brands, such as our members, stand to be shut out of the market if the world's largest beer manufacturer is allowed to control its own distribution." But then they go further, pointing fingers directly at A-B's Louisville branch operation, saying that it does not provide an open marketplace for all beer brands, saying that the branch's website displays only A-B brands. They claim that "over time, many smaller brands are likely to simply disappear from the market."

These letters raise some good points. Makes you scratch your head and ask a few questions. To wit:

-What would the U.S. beer market look like if A-B kept buying up more family-owned distributorships - at least where it's allowed by state law? (And we all know the number of states that allow suppliers to own distributors is shrinking, of course.)

-What would all of this mean for craft?

Makes you wonder, with all of the rumor mills working overtime about A-B's next purchase - and financing - is this really the time to be picking a bone with someone named Country Boy in Kentucky? I guess time will tell.

FOR WINE AND SPIRITS HOUSES, BIG PAYOLA IS BUSINESS AS USUAL

The Major Brands vs Diageo/Glazer's trial is providing some very interesting insights into how the wine and spirits business apparently operates. In particular, the kickbacks from distributor to supplier are enormous.

Through the course of the trial, it has been revealed that not only did Glazer's indemnify Diageo against possible damages as a result of the lawsuit (which could reach over $100 million), but it paid big bucks to get the business in Missouri in the first place. I get it that their margins are larger than beer's, but check out these numbers.

On March 5, 2013, Glazer's and Diageo signed a three year distribution contract with a two-year term to expand. The stipulations include:

-$20 million upfront payment from Glazer's to Diageo
-$5 million per year in addition
-Glazer's will designate 85 dedicated employees to Diageo
-Unlimited indemnity

In all, it amounts to a $85 million package, for the distribution rights for one medium sized state. Major Brands says this is cause for their tortious interference claim against Glazer's. Glazer's and Diageo were quick to point out that MB has offered similar deals to other supplier partners since losing Diageo, including an $11 million upfront payment to Constellation Brands.

We are hearing more and more of similar type payments made by beer distributors (and W&S distributors) to craft brewers for distribution rights, and the dollars are getting bigger by the day. It's getting to be a wild west out there.

Ed. Note: For a very complete depiction of the Major Brands trial, check out our comprehensive coverage in our sister publication, Wine & Spirits Daily, which I've temporarily opened up for BBD readers, here>>

Until tomorrow, Harry

"My Grandmother is over eighty and still doesn't need glasses. Drinks right out of the bottle."
-Henny Youngman


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