Craft Consolidation: Endgame

Powerful competitive and financial forces are driving large and small craft brewers to seek new solutions. We see the Boston Beer/Dogfish Head deal as a catalyst that kicks craft consolidation into high gear and presents an entry point for international brewers.

Take-aways from the Beverage Forum 2019

On May 9, the Boston Beer Company announced plans to acquire Dogfish Head Craft Brewery for USD 300m – bringing together the #2 and #13 craft brewers by volume, respectively (per Brewers Association). The deal price represents a 2.5x to 2.7x multiple of Dogfish Head’s 2019 projected sales (~USD 1,000/barrel). The price is well below the >USD 2,500/barrel that Constellation paid for Ballast Point in 2015 (which marked the peak of the craft beer M&A market), but is in line with Asahi’s recent purchase of Fuller’s in the UK (on EV/sales).

This deal reflects Boston Beer’s desire to improve its top-line growth trajectory. Jim Koch, the company's founder and chairman, was clear: “We’re not going to be leading a cost-cutting roll-up of craft brewers.”

Boston Beer already has strong distribution in places like airports and stadiums that escape the reach of most craft brewers. Their amber, seasonal, and non-beer portfolio meshes well with Dogfish Head’s IPAs, and new innovations like SeaQuench Ale and Slightly Mighty. The geographic fit is reasonable, and both companies lean towards the MillerCoors network for distribution – a key overlap.

We see increasing pressure for roll ups among craft brewers, but this acquisition reduces the number of large craft brewers that could provide the significant production and sales capabilities needed to serve as a backbone for the next craft beer roll-up.

As the number of partners with real scale decreases, the pressure to pair up increases. This becomes a game of musical chairs, with top craft brewers fighting not to be left behind. The relatively reasonable valuation for Dogfish Head may even invite new suitors to the table.

Consolidation Makes Sense

Having fewer targets and more suitors is especially relevant, given our belief that craft roll-ups are the natural progression of the industry – as we wrote in our 2018 report, The Great Fragmentation of Beer. In fact, the largest craft brewers already include multiple roll-up platforms like CANarchy, Artisanal Brewing Ventures, and Duvel.

Even the largest craft brewers are vastly under-resourced, compared to global market leaders. Partnering can increase production efficiency, strengthen key geographies, and round out a product portfolio.

PE and Bank Debt Might Drive the Next Round of Deals

Not every deal is about improving the top-line – sometimes repaying debt is the key. As recent craft growth has been dominated by the smallest brewers, results among top craft brewers have varied widely – leading to some large brewers with big names experiencing difficult sales trends and seeking outside investment, like Anchor selling to Sapporo.

In 2015, Dogfish Head sold a 15% stake to PE firm LNK Partners to finance expansion plans, with payment due in 2020. We believe the need to pay back PE is at least partially driving the deal – given the fact that roughly half of Boston Beer’s USD 300m payment is going to “financial investors,” including LNK.

This deal follows Avery Brewing selling an additional 40% stake of its business to Mahou San Miguel and Founders in April – after an expensive build-out in 2015 and declining sales in 2018, and may suggest the start of a trend.

The Window for International Brewers to Enter the US Is Now Open

Dogfish Head felt it necessary to invest USD 145m in its business over the last five years in order to battle increasing competition. As other large brewers contemplate their own future spend, it’s clear that outside investment from an international brewer may now be needed more than ever.

International brewers can try their own roll-up (as Lion is attempting), but the work is complicated, as most craft breweries are privately owned, with heavily involved founders – Dogfish Head’s sale was likely helped by the personal connection between the two founders. Interestingly, some global brewers may be waiting for someone else to do the dirty work – and be willing to spend more in acquiring a proven, established craft platform.

Potential catalysts for the next craft beer deal are abundant: AB InBev has a locked-in price at which it can buy Craft Brew Alliance through August 2019, more PE investments need to be repaid over the coming years, and more brewers who over-invested during the peak of craft growth will need to re-finance.

There will only be a limited number of opportunities to enter the US with scale – and the time to be looking is right now.

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