Beer Money 2.0

The craft beer landscape is littered with mega-beer buyouts, a bubble rumor that won't disappear, and so many brewers that some private equity investors see opportunity in barley and hops.

The chatter about a beer market bubble and consolidation is splashing through breweries and across bar stools, with a growing number of craft brewers fighting for the hearts and taste buds of tipplers across the country.

As brewing giants like Anheuser-Busch InBev and Heineken International hunt the craft landscape looking for buyout targets, private equity firms are becoming more familiar players in tap rooms.

Big-money deals like Heineken paying $500 million for 50% of Lagunitas Brewing Co. or Ballast Point Brewing and Spirit's $1 billion sale to Constellation Brands Inc. (STZ) bring shouts of "sell-out" around brew kettles. But transactions like Fireman Capital Partners investing in Oskar Blues Brewery are making a quieter headway.

Private equity investors are exploring a unique deal terrain. The craft brew sector has enjoyed consistent double-digit-sales growth. In 2015, craft sales made up 12.8% of the U.S. beer volume. But for the first half of 2016, that number dipped to 6.5%. Moreover, there have never been more brewers in the U.S.: as of June 30, there were 4,656 according to the Brewers Association. And while not all of them are trying to get their six-packs on retail shelves or their taps into bars and restaurants, there is a traffic jam.

Moreover, there's a quiet element of distress building in the market. Hellbender Brewing Co. in Washington filed for Chapter 11 protection this month, following the lead of Great Northern Brewing Co. in Texas the month before.

The Craft Beer Alliance, a holding company for a number of well-known craft brands including Redhook Brewery and Kona Brewing Co., laid off half its Woodinville, Wash., brewery staff last month. CBA's misfortune is even more notable because ABInBev owns 34% of the company.

Craft brewing royalty Stone Brewing Co. in San Diego put more than 50 employees on the street in October, citing declines in the company's sales and that of the sector. Stone has grown rapidly, opening a $25 million brewery in Berlin, the heart of Europe's beer garden. The company also opened a $75 million brewing facility in Richmond, Va., and plans on opening a tap room and brewing facility in Napa, Calif., in an area long dominated by the wine industry.

But PE sees the resulting decline in valuations as a buying opportunity."The market today is more attractive than it was 18 months ago in terms of investing," said Dan Fireman, managing partner with Fireman Capital Partners in Boston. "Valuations have been pretty high, and that is beginning to change."

Fireman has been a principal player as PE has bellied up to the bar of craft beer. The firm counts Salt Lake Brewing Co. and Oskar Blues in its portfolio as part of a holding company and fund called United Craft Brews LLC. It paid $35 million for a majority stake in Salt Lake, and it also holds a majority piece of Oskar Blues. But that brewery, perhaps best known for Dales Pale Ale and for bringing the old-fashioned beer can back into fashion, purchased Perin Brewing Co. and Cigar City Brewing Co., meaning that those labels fall inside Fireman's United Craft.

Fireman and others are up against a culture that values independence above almost all else. Lagunitas founder Tony Magee was strongly criticized when the Heineken deal went down, and, in turn, he pointed at others as a danger.

"The entrance of giant piles of private equity money and megabrewers is disturbing," he wrote in a blog the day the deal was made public. "Not because any of you here will be corrupted by it all, but because the distribution and retail tiers and the merely craft aware peeps out there can be corrupted."

While the liberty to brew a fierce double India Pale Ale free from the tyranny of corporate masters screaming about costs is central to the struggle, PE investors also face a more traditional hurdle, that of the need for a structured window for a timely exit to satisfy return-centric investors.

Sonoma County's Bear Republic Brewing Co. CEO and brewmaster Richard Norgrove said he recalls from his college business courses that PE investors have a timetable that doesn't have much to do Oktoberfest. "They answer to investors, which is one of the reasons we have kept this a family business."

When Kyle Leingang of Dorsey & Whitney LLP advises his craft beer clients, he tells them that a deal with a private equity firm is not a sentence that ends with a period, "I tell them it's a comma, because the deal is only part of it. The investor is going to need an exit and that may not bring them the outcome they want." Fireman says that his firm's approach to investing in craft beer is driven by the quality of the players, not tied to a hard time line.

Paul Barnett of Ulysses Management LLC says its investment in Lakewood, N.Y.'s Southern Tier Brewing Co. is there to provide more resources and allow the brewer to spend more money on marketing and growing the brand.

"We're a family office, so we are more patient," he said. "We look at how we can reduce production costs and move those savings into sales and marketing."

Besides Fireman and Ulysses, private equity deals in the craft beer sector in recent months include Enjoy Beer LLC and Abita Brewing Co., Encore Consumer Capital and Full Sail Brewing Co., and Riverside Co. and Uinta Brewing Co.

Even as PE is making inroads into the craft beer sector, brewing veterans are providing alternatives to brewers looking for capital. Lagunitas' Magee has taken minority stakes in Moonlight Brewing Co. in Santa Rosa, Calif., and Independence Brewing Co. in Austin, Texas, with an eye toward providing resources and staying hands-off on the brewing side of the business.

To the south, Stone Brewing founder Greg Koch put together an investment vehicle called True Craft to invest in minority stakes in other craft brewers with a group of independent investors assembling a $100 million stake in April. The goal of the angel-like investor group is to help craft brewers grow but remain independent, giving brewers an alternative to selling out to mega-brewers or taking PE capital.That doesn't mean that Koch won't welcome private equity at Stone.

In June, an investment vehicle was registered with the Securities and Exchange Commission, VMG Stone Brewing Coinvestment. The filing says that officers and affiliates of VMG Partners, an investment firm in Los Angeles, have agreed to invest $89.5 million in the vehicle. The minimum investment is $500,000. VMG is focused on investing in food and nutrition companies, including Kind LLC, Quest Nutrition and Natural Balance Pet Foods Inc. A spokesperson at Stone confirmed that VMG Stone and True Craft are separate investment vehicles.

Source: Yahoo

By Bill Meagher

Nov 21, 2016