Constellation Picks a Craft Partner


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Constellation's $1 billion purchase of Ballast Point announced this morning is like the "Brangelina" of the beer world: Two of the hottest cohorts in their respective camps collide, and everyone goes, "yeah, that makes sense." Obviously, Constellation was holding out to get into craft in a big way.

We got Constellation chief Rob Sands and Ballast Chief Commercial Officer Earl Kight on the phone to explain more about deal synergies and motivations.

CONSTELLATION CALLS BALLAST "CRAFT'S CROWN JEWEL." For their opening salvos, Rob called Ballast "by far and away the most premium of the major or significantly sized craft brewers" and "the absolute crown jewel of craft." As such their acquisition is "really important in maintaining Constellation as the number one player in the high end of the beer business." Ballast's $1.5 million in spirits revenues should also help solidify Constellation as the foremost retail growth driver of the entire U.S. beverage alcohol category (more on that end of the deal in sister publication Wine & Spirits Daily).

For Ballast Point's part, Earl shared that they sent out notice to distributor partners this morning on the deal. "I tried to answer their big questions on 'why Constellation?' right off the bat," he said. "In our opinion, it makes sense - they're brand builders: it's Constellation 'Brands.'

"We're going to work as a stand-alone company; our existing management team is staying in place," Earl continued. "The idea is, we continue to brew beer that we like to drink [read on for three new heavy-hitter brands], and stay true to our roots. And the entire team at Constellation Brands kinda has that crazy entrepreneurial spirit we love; they have a passion for beer; they have a proven track record of success; and ... access to their financial position and their willingness to invest in growth is right up our alley."

MANAGEMENT TEAM "PROBABLY THE MOST IMPORTANT PART OF TRANSACTION." It makes sense that Ballast would continue to operate on a standalone basis, said Rob, because "frankly you could hardly have more growth than they have. ... Part of this deal was all about having this management team that's running this business join Constellation. That's a very important part of the transaction -- probably the most important asset we're acquiring is the management team: Jack White [founder], Jim [Buechler, president], and Earl. This is a tremendous team."

BALLAST POINT IS OUR CRAFT DIVISION, SAYS ROB. With that, again, "Ballast Point is going to operate as a standalone company and it's going to continue to be run by Jack and Jim and their sales organization and marketing organization under Earl is all going to stay in place." But "obviously," said Rob, "Ballast Point will collaborate with Constellation and Constellation Beers to do what we can as partners to, in a quality way, accelerate the business - if acceleration even makes any sense when you're talking about a business that's growing at 150%."

Would there be any codification of a new Constellation craft division with Ballast's sign-on? "Ballast Point will be the new craft division so to speak," said Rob. As for chain muscle and synergies, "Ballast Point has its own resources in all of those areas. But as I said, there will be a strong collaboration where the teams think it makes sense." There's no sharing of production planned for the moment.

"A VERY REASONABLE PURCHASE PRICE." What else are they paying for with that cool Bill? "It sounds big, I suppose, on a nominal basis, but it's all about growth, right?" said Rob. So "when you take into account the growth of the business and growth in revenue and earnings, it was a very reasonable purchase price. It was one of those deals that worked out very well for Ballast P0int folks, and it worked out well for us. [In the press release] We quoted it as mid-high teens [EBITDA] on the basis of projected 2016 earnings. So for something growing over 100%, that is a very reasonable valuation."

WHAT ABOUT THAT IPO OPTION? Having started the earliest stages of IPO filing last month, Earl shared how Ballast evolved away from that option. "From our world, we felt like we had three very good options: One being going down the path of an IPO. One going down the path of a strategic partnership. And one, doing nothing and slugging [it] out on our own, which we were willing to do. But it's good to have options. ... So as time progresses in typical Ballast Point fashion, we kept our ears opened and we listened and when people thought we were going to zig - we zagged. So I think you keep an eye out and you don't pigeonhole yourself; it's kind of the Ballast Point way." Ultimately, it was "a very logical step for us to go down the path with the folks at Constellation Brands."

Rob took it from there. "From our perspective ... we basically talked them out of the IPO," he said. "We wanted Ballast Point to become part of the Constellation family, and we thought that Ballast Point partnering with Constellation probably created the greatest amount of synergy as well as opportunity to grow that business in the future, and obviously the Ballast Point folks agreed with us. So I guess we consider ourselves quite lucky that we convinced them of this option."

GOLD NETWORK AND CALI SYNERGIES. "Just sort of think about the power of this," Rob continued. "You take San Diego -- where Ballast Point is a major supplier to the Reyes group in San Diego -- and Constellation Beer has high double-digit share in Southern California, I think over 20% of the business. Just think about the powerhouse that creates in the distribution network.

"We were not kidding when we named our network the Gold Network, because it's gold for the distributors. This is only a feather in that cap - in terms of, number one, the growth we're providing at retail. And, number two, the profit in growth we're providing to our Gold Network. The beautiful thing is, Reyes is just one example - there's a lot of great overlap between the two." Though "Ballast Point will make its own independent decision as to distributor selection," the fact is "that there's a lot of overlap in any event."

ETC.: GLOBAL PLAYS, AN EAST COAST BREWERY? We asked Earl about prospects of an East Coast location and/or global plays. "So we've already got business happening in about 10 countries outside the United States and we're ramping up our efforts there," he said. "... It's a lot of fun to fly to South Korea and walk into a bar and be treated like a hero. So the international business will continue."

As for an East Coast location: "We've been poking around there for eight, nine months. We don't like to talk about stuff before we actually have it done."

NEW BRANDS: PINEAPPLE SCULPIN, WATERMELON DORADO, MANGO EVEN KEEL. We asked about more opportunities under the deal and Rob prodded Earl to share some new market offerings.

"We had a unique situation at L.A. Beer Week this year, where a couple of my reps actually reached out to brewers directly and requested some unique variations of some of our beers," said Earl. "In typical Ballast Point fashion, I didn't know about it until the tap takeover was happening, and somebody sent me a picture [of] brands such as Pineapple Sculpin, Watermelon Dorado and Mango Even Keel -- and they were a hit." So they're putting the brands in 12 oz. bottles. "We're presenting them to all the distributors right now and our national account team is actively selling them into the national accounts," Earl said.

Also look out for a beer called Sour Wench ("it's more tart than it is sour, and it's very difficult to make," per Earl) that will retail for around $16.99 per 6-pack of 12 oz. bottles. That will partner with Barmy, a 12% honey apricot ale, at same price point. It will hit draft too.

CONTINUED PRICING POWER. Few beer brands can charge such prices. "The pricing power of Ballast Point comes from the quality of the product," said Rob. "That's something we're very accustomed to in Constellation with our wine, beer and spirits business. Obviously, pricing power is all about the consumer being willing to pay for quality. That's a very important thing, it's not just about branding - that doesn't necessarily cut it. You have to have the quality in the product to justify the price. The wine business is all about that. That's why some bottles of wine cost $250, like our Opus One; or $150, like our Robert Mondavi Cabernet Sauvignon Reserve, where we get scores in the high 90s. And then some bottles of wine cost $3. So beer is following that model pretty closely, and the great thing is Ballast Point is at the high-end of quality."

BUT WHAT ABOUT A BACKLASH? But will the deal affect customer perception of the craft brand? "The beer is going to be made by the same people in the same place in the same manner that it has historically been made," said Rob. "So I think that [potential backlash is] just a bunch of politics. There's no reality behind any of that."

As for the Brewers Association definition of craft, Earl confessed: "I actually had to look the definition up."



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Until tomorrow, Harry

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