Joe Thompson of Independent Beverage Group of Hilton Head is a veteran consultant who represents buyers and sellers of distributorships during acquisitions. He sat down with Beer Business Daily recently to discuss the state of affairs of the beer industry M&A market.

JOE ON WHY DEALS HAVE SLOWED DOWN: “I think a combination of things. One, I think the low hanging fruit has been picked. I think there’s not enough pain. One of the things it takes, I’ve always said it takes both pain and pleasure to get their distributors settled. There has to be hurting on one side and that can come from anywhere of a number of sources. That can come from divorce, death, suppliers, too much discounting, bad business, low share, I mean a lot of things cause it but there has to pain on one side and there has to be a willingness on the other side to basically have it pay for the business. And there’s not a lot of pain out there right now. The malternatives helped people, the import category is growing, the pricing environment is healthy. And if you were to sell, where are you going to put your money right now? In the stock market? I don’t think so. You get one, two percent return on the beer business is almost like the tallest midget. [The suppliers want to] digest what they had eaten and at the same time figure how to operate it better after they got them consolidated. I think the faucet has been turned back.”

ARE MILLER AND/OR COORS RELUCTANT TO APPROVE MORE COMBINATIONS? “No, I think they just want to be careful. Miller is being more careful in their transition management. In other words, after you get a deal done, they want to make sure that the business is operating and managed well.”

JOE ON WHAT IS TYPICALLY UNDERESTIMATED IN THE BUYER’S PRO FORMA. “There are two things that people always underestimate. One is that it’s going to be more difficult and more expensive to do than you thought. It’s more expensive and more difficult because you just can’t anticipate the problems and the magnitude of what you’re getting into. That’s the bad news. The good news is, every time we do this they always underestimate the revenue increases-the profit per case increases. Because beer wholesalers are very good at picking up pennies and nickels and dimes. The drop sizes go up and the efficiencies are just there. The math works.”

JOE ON WHETHER DISTRIB VALUES ARE GOING UP. “I think for now, absent any public ownership, which it will be in the next two or three years, the prices have more or less peaked and have actually declined in the last six to twelve months. It could really see a big change if interest rates went up. If interest rates went up the price would go down fast.”

JOE ON BRAND VALUES. “[Domestic beer brands] generally go from one to one and a half times gross. One and a half would be on the high side; one would be probably most of the deals. Ninety percent of them are one times gross; Molson, probably one and a half. I heard the other day that a lot of Miller guys were starting to buy Pilsner Urquell. They are paying somewhere between one and a half to two times gross. Corona is still five times gross. You know it’s still rocking along on the east coast and on the west coast it’s more like three to four times gross. But that’s a pretty good range of values.”

JOE ON THE TRIANGLE OF TERROR. “Well, an acquiring wholesaler, that’s where he finds himself. The seller is gone. He has got his money and he’s gone. So you have the bank on one side which has all these loan covenants and ratios that you have to make now. You have the suppliers on the other side and they have all their demands and all of a sudden you go from being a two million case wholesaler to being a ten million case wholesaler. Their expectations go up exponentially. And they automatically want to fix every problem that you have ever had and they want it fixed right now because you have this new big pool of money. So they go after it. And on the other side you get competition and they smell blood and they know you are in a transition period so it’s an opportunity to pick up market share, so they are out telling all your retail customers. They expect you from day one to be service-perfect. Often you’re now as big as the Bud guy so they want you to service it exactly the way the Bud guy does and yet as a wholesaler your service is dead. You don’t have the money to invest in the marketplace.

“And so it’s these instant expectations, yet the wholesaler has to repay debt. So the bank is getting all the money that you need to fulfill these expectations and the poor wholesaler is just stuck in the middle. You’re left in a difficult position in the first two, three, four years, it’s a bitch. I mean it’s tough and eventually it gets easier, but the supplier wants you to go hire a marketing manager, or whatever they want you to do, and retailers want you to service them twice a week instead of once a week based on the assumption that because you’re bigger and more profitable you can do a better job, but it’s not true until that bank is paid back.”

NYC BANS SMOKING IN BARS. Not even New York City is safe from the health trend that is sweeping the nation: Patrons at bars smoked their last cigarettes last night at midnight . The city passed the no smoking ordinance just as the state of New York passed an even tougher ordinance to be enacted this summer. It closes a city loophole that granted an exemption for businesses that provide enclosed smoking rooms. (Philip Morris announced it would move its headquarters from Manhattan to Virginia soon after the ban was announced).

About 400 communities have banned smoking in bars and restaurants across the nation, with a restaurant smoking ban just passed in Dallas . What does it mean for on-premise beer sales?

Some people argue that consumers have a fixed amount of money, and money that goes to tobacco is less to be spent on beer. I don’t buy that. I believe the smoking bans will ultimately hurt on-premise beer sales as hard-core smokers (who are the hard-core drinkers usually) will choose to have parties at their homes or outdoors.

However, California banned smoking in bars about four years ago, and on-premise trends, while not great, are also not in the tanks either.