Will Craft Consolidate?

FILED MAY 10, 2013

Dear Client:

People have been predicting the rollup of the craft brewing industry for -- well, as long as I've been in the industry. There have been some thrusts and feints. When Miller acquired Leine's and Celis and A-B took a stake in Redhook in the early days, it was thought that this was just the beginning of a big gobble-up by the Bigs. But then craft slowed down and consolidation virtually stopped. Or almost stopped. In the late 1990s there was a flurry of expectation when flamboyant billionaire from India, Vijay Mallya, announced he was going to rollout the U.S. craft industry and took a majority stake in Mendocino Brewing Co. as a start. But no rollup ever materialized. Then Basso Capital bought Magic Hat and Pyramid, and we know how that turned out.

Today, with craft so hot and private equity circling above, that rollup talk is starting again. Craft brewers are getting inundated by calls from bankers. SweetWater Brewing chief Freddy Bensch got a handwritten note with a crisp $50 bill from a banker asking for a meeting, according to a piece in Bloomberg. He took it to the pub and bought a round, but didn't take the meeting.

How long can that go on? "A scarcity of sellers amid demand by private equity and major brewers could force open the tap within the next two years, dealmakers and brewers agree," says Bloomberg. But for the moment, times are so good that nobody is feeling any pain to sell. Townsend Ziebold at First Beverage Group points out that "none of them are really feeling any operation headwinds at the moment." They're "going to be smart enough and forward-looking enough to recognize some of the issues that are ultimately going to make competing in the industry more difficult. They're going to want to take money off the table," added Townsend.

But those headwinds aren't here, at least not yet. Lots of buzz has resurfaced lately of the Bad Ol' days of the late 1990s when the perfect storm of excess capacity, old beer, and pricing pressure hurt the industry. If that pain returns, I expect there will be some deals.

But it's not a given. As Jim Koch of Boston Beer pointed out to me recently, there are negative synergies in buying breweries, not the least of which is that no two breweries have distribution footprints which match up exactly, so you're likely going to be competing against yourself in many markets when you buy brewery.

And for now, there just aren't that many sellers ..... yet. Larry Bell from Bell's Brewery says an exec from a mega-brewer slipped a business card into his pocket at our Beer Summit in San Diego last year saying only, "You're selling. I'm buying."

Larry's not a seller though, telling Bloomberg: "It takes so long to build equity in the brewery, once you've got it -- especially if your name is on it," he said. "Do you really want to sell that to some private-equity people that are just there to make a bunch of money and flip it? What does that do for your legacy? That's not why I spent 30 years building the business." However, Larry says the first craft brewer to sell out "is probably going to get the most dollars per barrel. If you are on the fence and you think you want to get your money, that may be the time while the getting's good."

Another brewer not for sale is Stone's Greg Koch, who said, "There's no case to be made" for them selling out. Besides, if he needs money for expansion there are many banks lined up to lend him the money.


Despite steep opposition from distillers and others, the Missouri House has advanced the wine and spirits franchise bill by amending it to a bill which will allow homebrewers to pour their beers at festivals and charity events (see BBD 05-06-2013 ). The franchise bill had been stalled in committee until it was attached to the homebrew bill. The bill still needs approval in the Senate and the session ends in less than two weeks, reports the St. Louis Post-Dispatch. The House spent nearly two hours debating the franchise bill, and it has been the focus of lots of phone calls to lawmakers and over thirty lobbyists.


THE BEER INSTITUTES' BEER Act just dropped in Congress yesterday, as expected. Ironically, the bill would reduce the excise tax on brewers producing 15,000 barrels or less, a larger savings for smaller craft brewers than even the BA's BREW Bill. For brewers under 2 million barrels, the tax is $3.50 per barrel up to 60k barrels, with all other brewers getting their excise taxes cut in half to $9 per barrel. Neither bill is expected to pass unless by some small chance one or the other gets attached to a more comprehensive tax reform initiative.

CRAFT BREW ALLIANCE reported Q1 depletions up 5%, non-contract shipments down 3.3%, and unchanged full-year guidance of between 7%-11% depletion growth. Ops chief Andy Thomas says: "We enter Q2 by far the most excited and confident about the health of our company, our portfolio and all of our brands as we've ever been." On a days-unadjusted basis, April CBA depletions are up in the mid-teens, propelled by the growth of Redhook with Audible Ale, further acceleration of Kona via Big Wave, and a still-negative but improved trend with Widmer Brothers, driven by the intro of Alchemy Ale and "continued moderation of Hefeweizen."


-Flavored Beer Dominates Share Leaders
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BREWPIC: Crown Imports and Constellation Brands execs gathered at the New York Stock Exchange to ring the Closing Bell in advance of the Cinco de Mayo holiday to kick off the start of the summer beer selling season.

Until tomorrow, Harry

"Finance is the art of passing money from hand to hand until it finally disappears."
-Robert W. Sarnoff

--------- Sell Day Calendar ----------
Today's Sell Day: 7
Sell days this month: 23
Sell days this month last year: 23
This month ends on a: Fri
This month last year ended on a: Thurs
YTD sell days Over/Under: 0


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