SAM and Sam Combine Big Portfolios and Big Personalities

Dear Client:

Big, big news for craft, as two visionaries merge. We’ve been hearing lots of chatter on this deal for weeks, and this afternoon it finally emerged that Delaware-based Dogfish Head craft brewery has entered into a 100% stock merger, where Boston Beer Co. becomes the whole owner of Dogfish Head.

TERMS OF THE DEAL.  The transaction is expected to close late in the second quarter of 2019 (we’ve heard sometime in June).  

In the deal DFH basically gets about $127.7 million in stock and $173 million cash. So call it, DFH went to SAM for about $300 million, or $1,000/barrel.

The founders of Dogfish Head — Sam and Mariah Calagione — will receive approximately 406,000 shares of Boston Beer stock based on a share price of $314.60 ($127.7 million).  With this transaction Sam and Mariah will become the second largest non-institutional shareholders in Boston Beer. Jim Koch will remain the largest.

As for the $173 million in cash, “most all” of that “is for the benefit of Dogfish Head’s financial investors, with the exception of certain transaction-related expenses,” according to the announcement. So with this deal, Dogfish Head is exiting their LNK stake early (Recall in September of 2015, DFH announced it would sell a 15% stake in the company to the New York-based private equity firm, with a hefty note coming due at the end of 2020, which likely precipitated this deal).  Boston is basically buying that out with that cash portion.

Boston Beer believes “its current cash on hand and available line of credit will be more than sufficient to fund the cash component of the transaction.”

Dogfish Head results will be consolidated into Boston Beer’s financial results beginning late in the second quarter of 2019.

Boston Beer currently estimates that the transaction will be neutral to slightly accretive in 2019 and will not have a material impact on full-year 2019 earnings per diluted share.

SAM AND JIM SPEAK. We talked to both Sam Calagione and Jim Koch earlier today on the Who, What, Where, Wow.

“Mariah and I are all in,” an excited Sam told CBD this afternoon. They’re “personally not taking one cent out of this deal, other than transaction closing costs.”

With the cash they’re getting in the deal, Dogfish is setting up a foundation called Beer & Benevolence, a non-profit that co-founder Mariah Calagione will run.

Sam will have a seat on the Boston Beer Board (he’s expected to join in the beginning of 2020) and he’ll have the same title as Jim Koch: founder/brewer.

“EVEN STRONGER” IN ACTIVE LIFESTYLE “CRAFT.” Sam says he and Jim had some “informal conversations” about today’s announcement late last year. But they started really talking on the floor of February’s Extreme Beer Fest, when they were drinking beers together.

There, it became obvious how complementary their beer portfolios are: Dogfish with its 60 Minute, super hoppy flagship, and Boston with its classic Boston Lager. But after that, they both have a lot of “active lifestyle” brands: Boston with a high-end kombucha and the Boston Marathon beer, 26.2 Brew; Dogfish with SeaQuench, SuperEight (brewed with “superfood” ingredients like berries and quinoa), for example. Says Sam: They’re both “not only leaders with craft overall,” but with this partnership, they are “even stronger” in the “active lifestyle bev alc” in the craft segment.

ON DISTRIBUTION FOOTPRINT. What isn’t 100% synergistic is their distributor footprint, though it’s close. They both lean MillerCoors network but DFH is in a few Sheehan houses where Boston is not, for example.

Jim has often said that distribution dissynergies are a powerful disincentive for deals.

How will they address the respective footprints?

“Our intention is to bring the Dogfish Head brand into the Boston Beer Company distributor network. Luckily, a majority of the volume is overlapping.” And where that’s not the case, “in those states where there is a procedure to move the brands, our intention is to move them into the Boston Beer network.” Jim intends that Dogfish Head distributors “are treated fairly under the law of their state.”

Ultimately, Jim says: “It’s our intention to create the most effective and efficient distribution network without the negative synergies of working with competing wholesalers.”

JIM ON SYNERGIES. But of course, there are lots of synergies to be had here. On first blush, Boston can probably offer Dogfish significant distribution upside, and Dogfish, which earlier this year told CBD it plans to finish the year up double digits, can offer some upside for Boston’s beer portfolio.

“This is about growth,” said Jim. “This is not about cost cutting. We made that decision a long time ago: we’re not going to be leading a cost cutting rollup of craft brewers.”

We asked about potential downsizing in the merger.

“This is about the people,” said Jim. “A very wise distributor once told me, ‘people do business with people they like.’ This is a great example of that. I’ve looked at lots of potential acquisitions over the years … at least 50. And some of them had the spreadsheet synergies, but that wasn’t very motivating to me.

“I’m very excited to work with Sam and Mariah and their team. There are synergies in culture, innovation, energy, leadership and portfolio. Those are the primary synergies.

“…It’s gonna be ‘business as usual’ for 2019. With the only exception of what’s legally required as we merge our financials.

“And then in 2020, we’ll know each other much better. Next year, we’ll look at, are there any organizational changes that we want to make.”

WHERE DOES DOGFISH HEAD’S DISTILLERY FIT IN? Sam said both companies are “equally excited” about the “diversity” that Dogfish Head’s Distillery brings to the combined portfolio. Dogfish Head Distilling Co., which is up 89% YTD, is only in about 5 states compared to the brewery, which is in 44. Will they expand the distillery side of the business to more states? Sounds like it. “We’ll now be looking at growth of distribution strategy for our distillery in harmony with our developing strategy for all the other beverages in our combined portfolio,” said Sam.

DELAWARE BILL NEGOTIATED. Current licensing privileges for microbreweries and brewpubs in Delaware are only extended to those who fall under a 2 million barrel cap, which the new combined company surpasses. But there’s a bill in the state Senate that calls for the cap to be pushed up to 6 million barrels (mirroring the BA definition; but also some federal codes, Sam told CBD) and is very likely to pass, and become law. Indeed, Sam told CBD that nothing will change about their licensing privileges in Delaware, because they had “great respectful negotiations” with their in-state distributors and their lobbyists, as well as the Delaware ABC commissioner and settled on language “that allows our [facilities] to grow, while keeping their expectations of integrity of the three tier system.” The release notes, in fact, that the newly combined company “will maintain a significant presence in Delaware.”

SAM ON JIM AND JIM ON SAM. The DNA seems to work, as Jim Koch and Sam Calagione are both pioneers of craft in the Northeast.

Sam sums it up: “Jim and I have been friends for two decades, served on the BA Board together … helped to form the Brewers Association, and helped with the other beer pioneers to create the definition” of craft.

Said Jim of Sam: “He’s made a lot of the ‘I wish I’d made that’ beers: Like 60 minute, like SeaQuench, like 120 Minute… and now Slightly Mighty [95-cal IPA], that was also a ‘Wow’ beer when I tasted it a few months ago.”

OUR TAKE: On first blush it seems pretty cheap, particularly when looking at deals like Lagunitas/Heineken and Ballast Point/Constellation.  On the other hand, those deals were struck in headier times for craft, and Sam was a motivated seller who also wanted to protect his culture and his BA definition status. Not an easy situation.  

The deal is worth around $300 million for around 300k barrels, or about $1,000 a barrel. According to Boston Beer’s current market cap, Boston’s valuation trades at around $885 per barrel, but those barrels are much cheaper at retail. It looks like Boston got a good deal, but Sam and Mariah also presumably got protected from paying back LNK.

So it appears that both sides got what they wanted and needed, and the integration should be smooth. Given Boston’s chain performance, it also appears to me that there will be some significant sales growth opportunities for DFH brands on distribution and chain execution alone.

What do you think?  Ping me



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Until tomorrow,

Jenn, Jordan, and Harry

“It’s hard to be nostalgic when you can’t remember anything.”

– Unknown

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