Sam Adams Boston Beer's Glass Still Less Than Half Empty

You may need a beer for this one. 

Disappointing third-quarter results released Thursday evening confirmed that Boston Beer, the $2 billion owner of Sam Adams and Angry Orchard and one of the country's largest independent craft brewers, is falling flat. Revenue plunged by a record 13.5 percent as shipments declined, and the company had to lower its earnings guidance for the year to $6.30 to $6.70 a share, down from a previous estimate of $6.40 to $7. Its shares tumbled more than 6 percent when the market opened Friday morning. 

Brewtal

For the first time in more than a decade, revenue is slipping -- and faster than analysts expected. Boston Beer hasn't been the only craft brewer in town for a while now, but competition is tougher than ever -- think of how many craft brands you can name. Short interest ominously spiked in the stock this week just before the earnings report because scanner data from IRI revealed that most of Boston Beer's big brands experienced volume declines, save for the summary Twisted Tea. The company's new, low-calorie Truly fruity spiked seltzer was a bright spot, too, and yet a sign of where some of the trouble lies: Not only are consumers shifting toward seemingly healthier foods, they're looking for similar options when it comes to alcoholic beverages, as paradoxical as that may sound. 

Sam Adams Critics

Almost 19% of Boston Beer's shares are sold short, the highest since March 2013. As Boston Beer's stock becomes less appealing to investors, it's becoming that much more attractive to industry acquirers looking to add higher-margin craft beers to their portfolio as market growth slows. What had been a more than $4 billion market value in January 2015 when Boston Beer was trading at its highs is now less than $2 billion. Its Ebitda multiple has shrunk from 23 to around 10. 

For those who insist that Jim Koch -- the company's 67-year-old founder, chairman and controlling shareholder -- would never sell his baby, don't be so sure. Competition is only going to get tougher and a takeover premium will be increasingly enticing. Selling also doesn't have to (and probably wouldn't) mean Koch's immediate exit. We've seen an M&A trend across industries involving stubborn sellers, in which the acquiring company agrees to keep management who are central to the business and let them operate with a certain degree of independence. Constellation Brands, the wine and spirits maker, has operated this way with recent acquisitions such as San Diego's Ballast Point Brewing.

Then there's Boston Beer's tax rate. The company projects it will pay about 36 percent for the year, while it competes with foreign giants such as AB InBev, which had a rate of about 21 percent last year. In July of 2015, Koch drove home the point in his testimony before a Senate committee about how the country's high corporate tax rate is driving U.S. businesses into the arms of foreign buyers, adding that he'll probably be the last American owner of Boston Beer. Chicago's Goose Island, Arizona's Four Peaks Brewing and New York's Blue Point Brewing have all sold to AB InBev, while California's Lagunitas sold a chunk of itself to Amsterdam-based Heineken, just to name a few. 

There is one American company that would be a logical buyer for Boston Beer, and that's Constellation, based in Victor, New York. The $34 billion company is known for products such as Robert Mondavi and Black Box Wines, as well as Svedka vodka. But as I mentioned earlier, it's been expanding into beer, having acquired Ballast Point and the rights to sell Mexican brands Corona and Modelo in the U.S.

Constellation has also talked about its "premiumization" strategy when it comes to beer, and Boston Beer would fit into that because it generates more revenue per hectoliter than most of the world's top brewers. Also, because more overhead costs could be wrung out of Boston Beer (its operating margin remains on the lower end), there is the potential to increase profitability. 

Small and Mighty

Boston Beer doesn't brew nearly as much product as its larger rivals, but its premium pricing generates more revenue per hectolite. The company could also lure Japanese buyers, which have been on a cross-border deal binge thanks to a combination of lack of growth in local markets and negative borrowing rates. Kirin is one to keep an eye on. The $15 billion brewer has been scouting around the U.S., which led to it purchasing a 25 percent stake in Brooklyn Brewery this month. It also recently bought New Zealand craft brewer Panhead.

Berenberg's Adam Mizrahi -- who along with at least three other analysts recommends selling Boston Beer shares -- has another idea for how Koch can exit the company and still preserve his legacy: a leveraged, tax-efficient ESOP transaction. An ESOP, which stands for employee stock ownership plan, involves selling a business to its employees. These have gained in popularity, particularly among private, small businesses, as owners in the baby boom generation approach retirement and don't have a clear succession plan nor the desire to sell to a third party.

However, an ESOP would be far less exciting for Boston Beer's other shareholders. And the more competitive challenges Boston Beer faces, the harder it will be to shun an attractive offer.