Do Franchise Laws Devalue Craft Co’s?

March 31, 2011

Do Franchise Laws Devalue Craft Co’s?

Dear Client:

After yesterday’s manifesto-lite on this watershed M&A year, many of you wanted to weigh in. One truth squadder highlighted an issue that hasn’t gotten much light: Do franchise laws in fact devalue craft companies?

They started their point with a pertinent question: What’s the valuation for
craft brewers? We’re starting to get a swath of benchmarks. The public companies are Boston Beer and CBA. Boston’s market cap is something like $540/barrel (since that’s one industry standard of counting, though it ignores the relevant financial metrics like earnings, ebitda, cash flow, etc). CBA without Goose Island is about 590,000 barrels, and their market cap is about $160 million net of the cash from the Goose Island sale, or $270/barrel. The Pyramid/Magic Hat transaction was never public, but the truth squadder guesstimated $30 to 40 million so roughly $35 mill, which was about $100/barrel. And Goose Island was sold for about $300/barrel. So now we’ve got a decent range.

But look at the difference between Goose Island and Pyramid/Magic Hat:
It was 325,000 barrels, acquired at $35 mill. Goose Island was about a third of
that size, bought for $39 mill. Large discrepancy between those two. And one of
the things that nobody really talks about, but that might be one of the reasons
that ABI was able to pay that kind of money for GI, was that GI gave ABI a clean,
compatible distributor footprint. Without the ability to put the acquired company
into the same distributor footprint, the value would have been a lot less. In
fact, the deal might not have made sense at all. And Pyramid/Magic Hat couldn’t
give that to any acquirer. Like most craft brewers, their distributor network
was a mixture of Red, Blue/Silver and All Other. Hence the reduced value.

Anyone with an existing distributor network acquiring Pyramid/Magic Hat, our source believes, would end up in the Heileman Situation, which is now the Pabst situation: competing distributors in the same market. That significantly reduces the value of the acquired brewery because it is almost unmanageable at the sales level, says the source – you’ll have two wholesalers in the same market selling different brand sets you own, and you’re not going to get either one to cooperate wholeheartedly. It’s harder to get full distributor commitment, harder to get info, harder to run incentives, and the brewer is always under suspicion because the salesperson is one day in wholesaler X and next day selling a competing brand in wholesaler Y. And under the current system of franchise laws, r ationalizing the distributor network is difficult to impossible. So the acquirer gets worse than no synergies in the market, they get negative synergies and the value of the brewery is significantly reduced. Could this be one reason there’s been less consolidation among craft brewers than anyone would have guessed 5 years ago?

We note that, on the other hand, franchise laws incent distributors to invest behind craft brands because there’s less fear of losing them, and that investment increases the brands’ value. Thoughts?


THE SMALL BREWER REINVESTMENT AND EXPANDING WORKFORCE ACT (Small BREW Act), H.R. 1236, was introduced by Representatives Jim Gerlach (R-Pa.) and Richard E. Neal (D-Mass.) on March 29. It’s the House version of Senate Bill S. 534 by Kerry and Crapo, which seeks to roll back the beer excise tax rate to $3.50 on the first 60,000 barrels and a new rate of $16 up to 2 million barrels for U.S. small brewers (producing 6 million barrels or less).

BELL’S IS INSTALLING A CANNING LINE THAT KNOCKS OUT 500 per minute as part of its ongoing expansion plans, according to Michigan Live. CBC-goers learned that the cans are now about 3% of craft sales, or 100 million cans, according to Paul Gatza via Ball Corp.

BOULDER BEER TIPS ITS HAT TO BEER TOURISM when The Pub at The Boulder Beer Company opens on Saturdays starting April 2, according to Denver’s Westword.

NORTHERN BREWER homebrew supply shop has apparently changed the name of its Two Hearted IPA clone kit, after Bell’s issued a cease and desist letter last week. The new name of the kit is Dead Ringer, “an homage to a benchmark of the American IPA style that’s brewed in Michigan.”

SHINER will start distributing to New Jersey April 1.

STONE OAKQUINOX, one of the largest wood-aged beers festivals in the country, will bring over 100 different beers from 9 countries to the brewery April 17.

Clarification: In yesterday’s issue we reported speculation that “Lagunitas’momentum and expansion as ripe for the picking.” We should note that while there are plenty of folks who would be interested in Lagunitas, they are in fact no deal in the works. And in fact Lagunitas’ folks took umbrage to even the suggestion.

Until tomorrow, Jenn

“The hunger for love is much more difficult to remove than the hunger for bread.”
~Mother Teresa

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