The Latest on Craft Investment Options

Dear Client:

Many have been publicly wary about private equity’s increasing involvement in craft. Lagunitas founder Tony Magee told his distributors last year that there could be hundreds of private equity deals we don’t know about [see BBD 09-21-2015]. That could be a problem because, as Boston Beer founder Jim Koch bluntly stated at an industry event back in March, The endgame for traditional private equity funds is “to get a liquidity event.” I.E., Flip The Brewer [see CBD 03-31-2016].

But Vann Russell, founder & managing Partner at Arlington Capital Advisors, actually made the case for PE industry investment at the Brewbound Session last week.

Vann and his firm have advised on numerous deals inside the craft space. This year alone, Arlington has helped out on the Southern Tier/Victory tie-up, the Oskar Blues/Cigar City transaction, and advised Stone Brewing in the investment they received from the PE firm VMG.

ON PRIVATE EQUITY “MISCONCEPTIONS.” PE firms like VMG, LNK and TSG “are more growth equity investors,” Vann said: their typical structure is generally a minority investment. It’s more of a partnership approach with these firms, he said, “they’re not in the business to run a brewery.” Generally, there’s no “mechanism” for PEs to grab control of the business. The idea for PE investors is, “we’re going to put a dollar in and we’re going to get more than a dollar out at a certain period or time.”

He feels one of “the misconceptions of PE is that it’s such a negative for that capital to be flowing into the space.” As Vann sees 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.

Vann believes some of the minority platforms coming together like Oskar Blues Holding Company, Artisanal Brewing Ventures and True Craft can be “very, very effective.” He says the “the idea is very sound,” which is “bringing together like-minded players and leveraging resources to help in a very tough and changing environment.”

ULYSSES. When Arlington set out with Victory Brewing, they were really looking for a great result for the shareholders at the brewery. “We didn’t necessarily say ‘we’re going to sell to Ulysses [Management] and that’s what we’re going after,'” Vann said. But it just so happened to be a great match with Southern Tier in geography and distribution footprint.

“I’ve never seen a distribution footprint lined up so well,” he said. Their idea in joining forces was really centered on gaining share of mind from wholesalers. They saw that if they put these two breweries together, all of a sudden they’re a 250,000-plus barrel brewer, and very significant player in the mid-Atlantic.

The next move for Artisanal Brewing Ventures “will be interesting to see,” Vann said. “Do they make another acquisition in the mid-Atlantic?”

FIREMAN CAPITAL. The Fireman-backed Oskar Blues Holding Company “is similar in that they want to leverage their salespeople,” Vann said, but it’s more brand driven and not about picking up brewers close to Colorado. It’s finding great brands that kind of fit together with what Dale Katechis and his team at OB want to put out in the marketplace.

Oskar Blues is “making a lot of strides” in their strategy, Vann said. He praised their ability to go out and get a brand with pent-up demand like Cigar City. It’s a huge win for Cigar City founder Joey Redner as he is “able to leverage some of the expertise and some of the things that Joey personally would’ve never done on his own,” Vann said. “So he’s still able to participate he still owns part of the business and he’ll continue to collaborate and eventually they’re probably going to build a new brewery down in that area.”

Vann didn’t offer much color on Stone Brewing’s True Craft platform, but said that he thought it would be a “successful” endeavor. The platform has yet to name a single partner, but Vann said they have “certainly been in the process of talking to several different players.”

NEW HEINEKEN-BACKED PLATFORM? Another rollup platform involving Heineken and Lagunitas may soon emerge. Vann said he recently spent a day with Lagunitas founder Tony Magee and learned they’re “considering putting out a more defined approach with the backing of Heineken to make investments and partnerships with smaller breweries.”

So there’s still a lot to see what happens with these rollups, but Vann is confident in this approach because there’s “a lot of smart money and a lot of smart players behind these platforms.”

IPO? NO… Will any of them roll up to an IPO? Vann doesn’t think so. “I think on the IPO side of it, the public markets just aren’t there for the craft beer space right now.” They’ll probably come back, he said, but it will be for those who have the story and are experiencing at least double-digit growth.

“I think what you’re going to see more of is public companies going private,” Vann said, and he predicts it could happen as soon as next year. “In a lot of cases it just doesn’t make sense to be a public company,” why go through the hassle of being one if the market is not valuing your business appropriately, he reasoned.

BUT MORE FROTH FORTHCOMING. “I think 2017 will certainly be very frothy,” Vann told the audience. He says Arlington and other financial advisors are already working on “a lot of transactions.” With all the activity that’s occurred over the last couple of years, some people are “concerned they might miss the window of opportunity,” said Vann. “But I think you’ll see 2017 will be as frothy in number of transactions that we’ve seen over 2015-2016.” However, Van thinks the size of deals will be smaller and involve smaller brewers.

OCTOBER STATE BY STATE SHIPMENTS DOWN ALMOST 6%

With one fewer selling day this year, October state beer shipment volumes were down 5.8%, per Beer Institute. That brought the YTD number to barely up, o.2%.

In fact, all but a handful of states were negative for the month. The Pac Northwest fared the best, with Washington up almost 6% and Oregon and Idaho each up a little more than 2%.

Still, BI economist Michael Uhrich shared that some state economies are improving: 24 states and DC showed improvements in the unemployment rate and labor force participation rate during October. And “beer category performance in these states during October was an average of 2.4 points better than in the 26 states where these metrics did not improve,” per Michael.

Until tomorrow, Harry

“I really do believe I can accomplish a great deal with a big grin, I know some people find that disconcerting, but that doesn’t matter.” – Beverly Sills

———- Sell Day Calendar ———-
Today’s Sell Day: 3
Sell days this month: 22
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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