Grokking the Boston Beer – Dogfish Head Deal

Dear Client:

In what is by far its largest deal, Boston Beer Co. announced yesterday that it will acquire all of Dogfish Head for about $300 million [read details here in case you missed it: BBD 05-09-2019].  

We are now here to grok it from as many angles we could think of. But before we get to grokking, it’s sometimes wise to dig through the archives and see how both companies got to this place.

This deal has been rumored for weeks, although the details were kept remarkably quiet for a deal of this size.  Industry sources conjectured that DFH founders Sam and Mariah Calagione had a reckoning looming at the end of 2020 with a private equity firm, and that Sam was actively lobbying Delaware to increase its taproom cap from 2mm barrels to 6mm barrels.  

Like many craft brewers at the time, when craft was growing double digits in 2015, the Calagiones decided to table some cash and sold 15% to New York private equity firm, LNK Partners, at a high valuation.  While they presumably didn’t need the cash for the business, sources say that Sam was looking forward to having a partner with sophisticated financial and operating expertise.

Indeed, we wrote a piece in BBD back in late 2016 covering Vann Russell, founder & managing partner at Arlington Capital Advisors, and his case for PE industry investment at a Brewbound Session.

There, Vann said one of “the misconceptions of PE is that it’s such a negative for that capital to be flowing into the space.” As he put it, brewery owners are in a capital-intensive space “and PE is in the business of allocating capital.

“If you’re just looking for money you can go to a bank,” Vann said. But in partnering with a PE firm or financial investor, you are able to tap into their experience and resources.

Guess who advised Dogfish Head on selling the 15% stake to LNK in the first place?  Arlington Capital Advisors, who also advised them on the merger with Boston Beer. Arlington is everywhere you need them to be.

Clairvoyantly, as usual, Boston Beer chief Jim Koch noted at the 2016 “Meeting of the Malts” event that “funds have finite lives … when those fund lines get to the end [fund managers] have got to sell those assets.” The endgame for traditional PE funds is “to get a liquidity event,” he told the audience.

Still, Dogfish Head, who only sold a 15% stake, couldn’t get caught up in that, right? As Forbes wrote back in 2016, predicting “The Second Wave Sell-Off”:  “The effects might be mitigated for a company like Dogfish Head, which only sold a 15% stake to LNK Partners.”

But back then, nobody could foresee how craft beer sales nationally — particularly for packaging breweries — would stall.

So now we have the news that DFH is selling to Boston Beer to not only clean up the PE situation, but to take both DFH and Boston Beer’s beer divisions to a new level. And after grokking it, it seems to make sense.  Read on……

JIM DOESN’T LIKE DOING DEALS.  First off, the Boston Beer Co. is notorious for not pursuing craft brewers to buy, and as Jim Koch told us yesterday, he’s looked closely at over 50 deals.  He explained why to us in January at our Beer Summit:

“When I think of a craft brewery it’s not like a balance sheet, income statement, EBITDA multiples,” Jim said. “It’s generally a real human being and the expression is there, passion and interest.” So “when you take that away, you’ve really taken away what makes it unique and special.” It doesn’t “feel right,” Jim said. Plus, “your synergies are often just firing people, so that’s not such an inspiring business endeavor.”

Also, Boston Beer has “never laid off a person” in its 34-year history, so that bodes well for the integration of the two.

However, Boston Beer is clearly leaving the door open to do more deals, as they call this new venture a “platform for craft beer and beyond.”  As Boston Beer CEO Dave Burwick, the person who will lead the combined company, said in yesterday’s announcement: “We expect that we’ll see more consolidation in the Craft industry over time, and we’ll be in the best position to take advantage of those changes.”

ON DISTRIBUTION FOOTPRINT ISSUES.  Dogfish Head shares about half of its distributors with Boston Beer, although it’s more aligned when you look at volume. DFH is with several Breakthru houses (wine and spirits) and Sheehan, for instance, where Boston sells more through blue-silver distributors.  Aligning those footprints will take time and pressure and money, but I don’t think Jim or Sam have any disillusions about getting to 100% alignment, at least in the short term. One thing I am certain of, is that this deal wouldn’t have happened if they didn’t at least have over 50% alignment in distribution footprints. Jim simply doesn’t roll that way.

NOT ABOUT COST SAVINGS.  One other thing that has been consistent about Jim, and Sam for that matter, is that this was not about carving out cost synergies. Jim is on record with me and many others saying he has no interest in being involved in mass layoffs. Life is too short and it’s much better to focus on growth.

ON SALES SYNERGIES. And it’s clear that their portfolios are very different.  DFH skews toward high priced high ABV IPAs, exactly where Boston has been deficient. Boston has the iconic lager and tea and hard seltzers to support a large chain and sales support infrastructure that can be leveraged to lift DFH brands’ visibility at retail. More than 80% of the game in the beer business is just showing up, and Boston has the resources and network to bring DFH to the table.   

ON JIM AND SAM.  Sam and Jim have very different personalities. I recently had beers with them both, separately, at our Beer Summit last January on Coronado Island. It’s not the first time I’ve spent time with them of course, but my recollection on that sunny day on the Pacific was in bas relief:  Jim is more cerebral, Sam is more seat-of-pants, socially at ease, and yes, off-centered.  

They are both clearly brilliant and charismatic, but in different ways.  Sam is a man of words and language, Jim is a man of ideas and strategy. Jim can be suspicious like a fish-eyed grandmother at Thanksgiving watching over her silver, while Sam can be overly trusting like a Lab puppy devouring a poisonous frog.  Sam exudes youthful enthusiasm, as Jim is a wizened old Pawnee chief chewing on a peace pipe as the industry, particularly his wholesalers, hang on his every word.

Where they share a trait for sure: they are both beloved not only by the industry at large, but by consumers. In a word, they are both very charming.  

And I think it works. I would submit that their strengths and weaknesses compliment each other just as their brand portfolios do. And the resultant company will be interesting to watch unfold.

PRIVATE VS PUBLIC.  One big hairy change for Sam and his team will be now adhering to the labyrinth of regulations and pressures of working for a publicly traded company, with quarterly earnings and all that Wall Street entails. There’s a little less pressure as Jim Koch does still own a majority of the voting stock, so he singularly calls the shots; but it’s still going to be a different life for Sam and his team. Like most self-made entrepreneurs, Sam is used to getting things done and asking about rules later. The public nature of the company may provide a culture shock in that regard.

THE PRICE.  At $500 per keg, the price looks pretty good for Boston, particularly when they paid nearly half in SAM stock, which is trading near its 52 week and all times highs. But as Sam said, “Mariah and I are all in” and “personally not taking one cent out of this deal.”

IS SAM THE ANOINTED SUCCESSOR?  Jim Koch has famously said that his succession plan is to simply “not die.”  This deal could provide Wall Street with some comfort that the next largest indie shareholder in the business himself built a brewery from scratch into a top twenty craft brewer, Sam A. Calagione, III.  (I added the middle initial and suffix to make him seem fancier for the sell side analysts).

Sam graduated Muhlenberg College in PA with a degree in English with post-grad work at Columbia.  Jim Koch has a bachelors, masters, and law degrees from Harvard. Neither are dummies. But at this point, what matters is experience in the beer business, and Sam clearly has those in spades. While Boston Beer’s day-to-day is run by professional execs, they most definitely just got a deeper bench with Sam and Mariah.  

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EDITOR’S NOTE:  UPDATE ON OUR READER APP

LAST CALL.    Our SchuPub reader app for iPhone and Android has been fixed and updated to now include imbedded links and images, just like the email and web versions. Download the app for free and start reading BBD and all our publications in one easy place on your phone or tablet.  Search app store for SchuPub.  

Until tomorrow,

Harry, Jenn, and Jordan

“The only reason why we ask other people how their weekend was is so we can tell them about our own weekend.” – Chuck Palahniuk

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