AN INTERVIEW WITH ANDY CHRISTON
Now that taxes are done (this is the first year, ever, that I didn’t file an extension), we can relax and relay a recent chat I had with veteran industry consultant Andy Christon of Ippolito Christon & Company, whose work in beer and bottler M&A gives him a front row seat to distributor valuations and deal making.
Here is an excerpt of the transcript of that conversation:
ANDY ON BACKGROUND OF HIS FIRM. “My partner and I both spent a lot of time at The Coca-Cola Company during the heyday of all the mergers and acquisitions and consolidation that took place in the late seventies, early eighties. I left Coke in eighty-six. Ugo, my partner, had left Coke in eight-two and so when I left in eighty-six I joined Ugo in a consulting firm that he had established. We renamed it Ippolito Christon & Co. and we have operated continuously since 1986. We’ve gone on seventeen years now. We are exclusively dedicated to commercial beverage companies and our clients are all bottlers and wholesalers. We do not, as a matter of policy, provide services or take money from suppliers.”
ANDY ON THE DIFFERENCE BETWEEN COLA BOTTLER AND BEER DISTRIBUTORSHIP CONSOLIDATION. “You know, you’ve got similarities of the distribution end of the business for soft drinks and beer, but because beer wholesalers do not manufacture the finished product, you do not have the same economic incentive to consolidate that soft drink bottlers have. As a result, on the soft drink side we saw the number of Coca-Cola franchisees shrink from about five hundred independently owned franchises in 1978, when I first toured The Coca-Cola Company, to about eighty today. The number of beer wholesalers we do not feel will shrink by that magnitude.”
WILL WE SEE PUBLIC OWNERSHIP OF DISTRIBUTORSHIPS? “We don’t see it any time in the foreseeable future. I think that suppliers would have sort of a hesitancy of going in that direction. Public ownership entails a whole new level of compliance with the regulations of the SEC and public disclosure. There are public disclosure and filing requirements of financial and other material matters. In addition there are issues of control that the suppliers may have problems with, when the distributor is publicly owned. I think there are some wholesalers, some large multi-location wholesalers, who would like to see public ownership as an alternative exit mechanism if and when they ever decide they want to retire or get out of the business.”
ANDY ON RECENT BEER DEALS. “In 2002 we worked on several Anheuser-Busch deals. We have not worked on any Miller deals recently; however, we have in the past worked on several Miller deals. Also we worked on a Coors deal that occurred up in Chicago . And we were aware of three or four other Anheuser-Busch deals that closed in which we were not involved. The pace of deals probably slowed a little. I think the year before and a couple of years before that we saw more.”
ANDY ON CHANGES IN DISTRIBUTORSHIP VALUE. We have not seen any measurable change either higher or lower in connection with values. The economic factors that determine value and cash flow of the underlying assets have remained about the same over the past three or four years. Interest rates remain very low and that’s conducive to high value. The volume of the business has remained pretty stable. Costs have not been excessive or inflated. It has not gone up dramatically. I think productivity continues to improve at all levels of the business and that obviously helps profitability and therefore value of an established business.”
ARE BANKS STILL LENDING AGAINST FRANCHISE VALUE? I think it all depends on the facts and circumstances of the particular entity that is involved with the financing. You’ll find that the stronger the cash flow the more likely a lender would go to the upper end of the multiple range in lending the money. Of course those factors that make for stronger cash flow are tied to the obvious operating characteristics composed of strong volume, high market share, and low operating expense ratios which produces high profit per case. So typically for an Anheuser-Busch wholesaler you’re going to get a higher multiple of debt than you would for any other type of wholesaler. By extension you would get even a higher ratio in a Coke deal because the cash flows there, at least until very recently, have been stronger than beer. But the Coke system has been going through some turmoil and you could almost make a case that the cash flows of a Coke franchise and a well run Budweiser franchise are getting pretty close to parity. The issue of value always comes down to profitability and free cash flow. That’s what determines value, not some “mythical” price per case or gross profit multiple per case. Those ratios are expressions of value but I underline the word “expression” because they are not a means of calculating the value, Harry, if you understand the distinction there.”
ON TERMINATION. “Certainly the factor that you have to always consider in valuing a beer wholesaler is the subjective risk that you have to assign in determining the potential for termination by the supplier of a particular beer wholesaler, of any beer wholesaler. That’s a factor that you have to take into account in assessing the cash flow of the business. When you use the income approach to valuing a franchise, the cash flows in theory are supposed to continue in perpetuity. The difficulty with doing projections in perpetuity is that there is a non-quantifiable risk that the wholesaler could be terminated. Therefore, that risk increases the discount that you would apply to the cash flows. That’s a subjective kind of assessment that goes into every valuation of a beer wholesaler. If a state has strong franchise laws that limit the ability of a supplier to arbitrarily exercise its wishes over a wholesaler, that improves the quality of the projected cash flow.”
WHAT VALUE ANDY BRINGS TO THE TABLE. “What we are able to provide is an extensive background in the business along with our valuation expertise. We don’t have to be taught the business when we come in to do a valuation of the Target Company. We’re able to put together realistic and plausible operating assumptions and projected cash flows of the Target Company that can be valued in a methodical way. This method is referred to as the “income approach” or the “discounted cash flow method” of valuing the distribution rights. And so we think we bring a high level of confidence to the underlying assumptions and the projections that are used to model the business. We are able to assist the buyer or the seller in negotiating the letter of intent, and in complying with the specific brewery approval process, whichever brewery applies in this instance. We are able to assist in negotiating the definitive agreement. Most importantly, or overlaying all of that, we are able to give the client, whether it’s a buyer or a seller, a valid calculation of the true underlying intrinsic value of the distribution rights without regard to the arbitrary price per case ratios or multiples of gross profit. These are always good as a check after the fact, but that’s all they are. These multiples and ratios are an after-the-fact calculation. They cannot be used to actually calculate the value of the distribution rights themselves.”MTD Sell Day: 12 Sell Days This Month: 22 Sell Days This Month Last Year: 22 YTD Over/Under Sell Days: 0 This Month Ends on a: Wed. Last Year This Month Ended on a: Tue.