Activist Investor Pushes CBA Sale

Dear Client:

Today, an activist shareholder of Craft Brew Alliance issued a note to the Board, urging it to pursue a sale to Anheuser-Busch InBev or another company.

David Cohen, founder of private investment fund, Midwood Capital, penned the letter today, made public in a release. The communication seeks to highlight “the substantial gap between the Company’s public market trading price and its intrinsic value.”

David urged the Board to “recognize the difficulties CBA faces to sustainably create shareholder value as an independent company,” and ultimately “pursue a sale of the Company either to its strategic partner and largest shareholder Anheuser-Busch InBev, or to a third party.”

COMMERCIAL AGREEMENT EXPOSITION. Recall, that under the commercial agreement struck in 2016, ABI has until August 23 of this year to extend a qualifying offer for CBA.

(A refresher on that: If ABI does not make a qualifying offer, then CBA would be entitled to the $20 million international incentive payment after the deadline. Furthermore, ABI couldn’t force termination of any of their new agreements, such as the master distribution deal; an international distribution deal; as well as the contract brewing arrangements between the two companies.)

Additionally, if ABI does not make a qualifying offer, “CBA could continue to operate independently or could then undergo a change in control,” chief Andy Thomas reminded listeners on their 2018 fourth quarter earnings call earlier this year. Plus, “ABI would still be required to respect the terms of all agreements, including payment of the $20 million international incentive, continuation of the master distribution agreement at $0.25 a case, continuation of the international distribution agreement and fulfillment of the contract brewing agreement.”

DAVID AND MIDWOOD’S POSITION. In David’s actual letter, he describes his firm as CBA’s seventh largest shareholder (exclusive of Anheuser-Busch InBev). Midwood basically owns 2% of the company’s outstanding shares, and their investment started in January 2017.

“Our interest in the company is simple … to see shareholder value maximized,” per note.

CBA represented an attractive “special situation” to Midwood upon their investment in 2017, per David. They included many of CBA’s alliances with A-B, from their distribution agreement, to “an uncommon situation whereby ABI was not only a commercial partner but also owned nearly one-third of the company and held two seats on the board of directors,” and the contracts signed in 2016 which also provided the framework for an eventual qualifying offer from A-B for CBA. Then too, Kona was attractive, as was its international expansion.

But it had its “challenges” too — like declining legacy brands Redhook and Widmer, which weighed on revenue growth, “structural challenges in terms of its profitability due to its scale” and “gross and EBITDA margins well below peers.”

But two years later, much of that story is the same, says David: revenue has grown at an average annual rate of less than 1% over the past two years, and “operating income in 2018 was essentially the same as operating income in 2014.”

While “management has entered 2019 with a new level of optimism” including depletions/shipments guidance of 5%-8% growth, “to no one’s surprise, this growth requires investment,” including an increase in adjusted SG&A of approximately $10 million.  

“While we appreciate the company’s willingness to invest behind higher growth, these investments are material and the bottom line is that there is no assurance that the company’s profitability will grow in 2019.”

GROKKING KONA’S VALUE. The timing of this letter isn’t that crazy if you consider the recent DFH/Boston headlines, as well as the August 2019 deadline for an A-B offer.

Using the $1,000/barrel rough estimation we just saw in the Boston/Dogfish announcement, Midwood opines, and based on Kona’s 500,000 barrel 2019 estimate, the brand is worth about $500 million; minus a little debt, that works out to roughly $23 a share for equity holders.

The point? “We would argue (based primarily on comparable industry transactions) that the intrinsic value of Kona alone – excluding all other CBA brands – should approach the current Qualifying Offer threshold of $24.50 per share.”

And “despite Kona’s virtues as a brand and its solid growth, the intrinsic value of this highly attractive asset will not be recognized by the public market with CBA as a stand-alone company.” Midwood thinks they lack the margin structure and scale of larger guys to grow profits etc. consistently.

“Shareholder value will then only be maximized through a transaction in which another entity determines what CBA is worth.”

BUT, THE RUB. We should note that the letter does acknowledge CBA brass throughout, lauding CBA’s foresight in putting potential deal guardrails into place years ago and saying they “value highly” Andy Thomas’ leadership.

Still: “With the current Qualifying Offer threshold of $24.50 per share,” and BREW currently trading around $15, “we would argue that it would be difficult to find a shareholder who would hold out for more than that price.”

With such a discrepancy between the locked-in share price for purchase and CBA’s current price, “the market is significantly discounting the probability that ABI will make an offer to buy the company.”

Obviously, “CBA’s leadership cannot control ABI’s willingness to execute on a Qualifying Offer. And we also know that if such deliberations were occurring now, CBA would not comment on them.

“Nonetheless, we believe CBA must find a buyer for the company in any scenario. If not ABI, then someone else.”

In short, says activist shareholder:

If ABI makes a Qualifying Offer, “we believe CBA’s board should absolutely accept it.”

If they don’t, “we believe the board should immediately announce a strategic alternatives process with a plan to sell the company.”

LATEST NIELSEN: CRAFT GETTING BACK ON TRACK?

It’s been a rough year for craft so far, but maybe things are starting to turn around – now nearly halfway through the year.

In the latest batch of Nielsen scan data, which stretches the four weeks to May 4, craft volume is up 1.2% in all outlet. It is the segment’s second volume gain in a row; craft was up 0.4% in volume for the four weeks ending April 27.

Now, two consecutive volume gains in Nielsen scan data may not sound like that big a deal, but in 2019, it is. Heck, craft volume making it into the black for a single set of Nielsen scan data is a big deal in 2019.

Before these two consecutive gains, you’d have to time travel all the way back to the four weeks ending January 19 to find a period where craft volume was up. It was up 2.1% then.

After that, craft volume turned in decline after decline, hitting a low in the four weeks to April 6, down 6.1%.

Despite that low and sitting in the red for the good majority of 2019 thus far, the segment’s volume is only down 0.9% YTD. Can craft keep this roll going and get back on track in the back half of the year? We’ll keep you posted.

SAM ADAMS TAPROOM IN DOWNTOWN BOSTON NOW SLATED TO OPEN IN NOVEMBER OR LATER

There was a chance that Boston Beer would open the doors to its Sam Adams taproom in downtown Boston this summer. The brewer has been building out the space, which sits next to the Sam Adams statue at Faneuil Hall in Boston, for a little over a year now [see CBD 04-13-2018].

But it appears November is now a more realistic opening date for Boston Beer’s third taproom, reports the Boston Business Journal.

“Frankly, I’d be thrilled if I could have a Thanksgiving beer there,” Boston Beer founder, Jim Koch, told the Biz Journal.

We got Jim on the horn to try and uncover more detail.

“Originally when we conceived of the project,” Jim told CBD, they were targeting July 4, for the obviously patriotic reasons. “But that was optimistic. … Since then, we’ve run into asbestos in one of the walls of the site,” Jim said, on which 40-year-old construction sits. “So that set us back a couple of months.” Then garden variety delays put on another month or two. “That gets us toward the end of the year. Ideally Thanksgiving, maybe New Year’s Day, something like that,” said Jim.  

He points out that they’re working with a site that’s had development on it for almost 400 years: “this is one of the oldest pieces of developed properties in the United States,” though they haven’t found anything historical that would slow construction.

All in, Jim says, things have gone well considering the difficult project they’ve undertaken, involving demolition, and then rebuilding and renovating part of what’s there.

And Boston Mayor Marty Walsh has been “extremely supportive,” says Jim.

WILL THE CONCEPT CHANGE WITH THE MERGER? With Dogfish Head founder Sam Calagione now coming on board, and his extensive knowledge in the hospitality side of the beer industry, the Biz Journal also asked Jim if the forthcoming concept would change at all.

Jim said the buildout will continue as is, but they could use Sam’s experience “in staffing and managing the space” once it opens.

“We aren’t good at that,” Jim said. “Sam’s been doing it 25 years.”

Until tomorrow,

Jenn, Jordan, and Harry

“Health is not valued till sickness comes.”

– Dr. Thomas Fuller

———- Sell Day Calendar ———-

Today’s Sell Day: 11

Sell days this month: 23

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