Were there fewer craft-brewery mergers and acquisitions in 2017 than in recent years? Has it become a buyer’s market? Will there be more “creative” deals in the craft-beer industry going forward? Let’s look at the perception and the reality of each of these three points.
Mergers & Acquisitions
Perception: After transacting and consolidating at a torrid pace since 2014, craft-beer merger-and-acquisition (M&A) activity has slowed down dramatically in 2017 and into early 2018.
Reality: This is not true. There were thirty publicly known transactions in the United States in 2017, which is an increase over 2016. However, many of these were smaller transactions or minority sales, so the total transaction value was likely significantly lower than in 2016 or 2015, and the relative lack of notable, large transactions may have led to a perception of fewer deals.
For the near future, the pace of deals is hard to predict. There are currently many more brewery owners who would like to sell their businesses than there are buyers for those businesses (at least at the owners’ current valuation expectations). The slowdown in the pace of acquisitions (as they’ve publicly stated) by the largest brewer in the world, AB InBev, could have a dampening effect on the market as they have closed the most U.S. craft-brewery purchases to date. Conversely, it could have the opposite effect if it encourages other buyers (both strategic and financial) to bid on deals that they would have previously abstained from for fear of being outbid by AB InBev. Similarly, private-equity buyers who were once very active bidders may become more selective due to slowing growth of the craft-beer category.
A Buyer’s Market?
Perception: What was a seller’s market in 2014–2016 has now shifted to a buyer’s market, and valuation multiples have come down significantly.
Reality: This is partly true and partly untrue. Sale valuations measured as multiples of the seller’s barrel volume, revenue, or EBITDA (earnings before interest, taxes, depreciation, and amortization) for most of the notable publicly announced transactions rose to very high levels in 2015 and 2016. While 2017 brought about some distressed sales and other transactions that were consummated at multiples that were significantly lower than the median for the past 2 or 3 years, there were still breweries that sold for very high multiples. What is less publicly known and reported is that there were a significant number of transactions that failed to occur because the buyer and seller were too far apart on valuation, and there were a number of sale processes that failed to generate any reasonable offers at all. In light of the valuation gap between buyers and sellers, it’s difficult to categorize the current market as a buyer’s market, but it is certainly not a seller’s market.
I expect these recent trends to continue for the foreseeable future. Companies and brands that demonstrate high growth potential will still command higher valuation multiples. Even in this new era where both growth and profits are more difficult to generate, there will be breweries that stand out with high growth, quality of growth, and margin potential.
On the less fortunate end of the spectrum, the valuation gap will likely continue for breweries that have the financial wherewithal to withstand the current pressures on volume and profitability. In other words, those breweries that are solvent and stable enough to continue as standalone entities but aren’t appealing enough to buyers to attract high valuations will likely hold off on selling.
However, as pressures mount on an increasing number of breweries to grow or maintain profitability, some may choose (or be forced to choose) to accept full or partial buyouts at valuations that are lower than they would prefer in order to either better position themselves for the future or simply stay afloat.
Perception: There will be an increasing number of more creative deals such as craft-on-craft acquisitions, mergers, and employee stock ownership plans (ESOPs).
Reality: This is likely true. Strategic buyers (i.e., existing breweries) have slowed their pace of acquisitions, and the financial-buyer pool is somewhat limited due to slowing category growth and three-tier restrictions (particularly for private-equity firms with investments in restaurants that hold liquor licenses). This lack of depth in the traditional buyer pool and the sheer number of brewery owners who would like to find a partner or sell out completely right now should lead to an increase in the number of creative deal structures and transactions.
Many in the industry have predicted craft-on-craft mergers and acquisitions for some time, and these have picked up steam in the past year. The potential synergies and cost savings via shared sales forces, procurement savings, and back-office centralization combined with the good PR of selling to a craft brewery rather than “big beer” has powerful appeal to many craft-brewery owners. However, these transactions remain difficult to execute successfully for a few reasons:
- Craft breweries (even the very largest) don’t have an unlimited amount of free capital, and many would struggle using what they do have to buy another brand rather than invest in their own brand or infrastructure in this difficult market.
- It is difficult to successfully achieve material cost savings in a combination of craft brewers. Cross-production is complicated, layoffs are ugly, and many breweries are loath to dilute their sales team’s efforts by selling more than one brand.
- If potentially acquisitive craft-brewery owners have any inclination to sell their own brewery in the next few years, they are perhaps better off focusing on growing their own brand in that time rather than growing a brand that they acquire.
I don’t claim to be an ESOP expert, but such plans may continue to gain traction because they can offer some enticing tax benefits, a good PR story, and additional incentive for employees. However, they are complicated to put into place and often result in an increased debt burden that can restrict future investments in sales, marketing, and capacity, so they may not be right for some breweries that expect to experience continued high growth.