Craft beer deals proved a refreshing treat for private equity firms in 2015 as the value of deals in the consumer sector tripled that of the prior year.
Globally, there were 64 beer company mergers in 2015, according to Dealogic. Total beer volume stood at about $133 billion, driven by Anheuser-Busch InBev’s $106 billion buy of SABMiller, Dealogic said. The sector saw about 30 North American craft beer sales, including a handful to private equity last year, sources said.
While the overall beer market is flat, craft beer is booming. The total U.S. beer market, valued at $101.5 billion in 2014, grew by only 0.5 percent in 2014, according to data compiled by the Brewers Association, a trade group for independent U.S. brewers. Craft beer volume, by comparison, increased by 18 percent in 2014 and was valued at $19.6 billion, the association said.
Craft beer companies can command high valuations. In March, Fireman Capital paid as much as 20 times the 12-month EBITDA for Oskar Blues Brewery, maker of Dale’s Pale Ale, Reuters reported.
Meanwhile, New Belgium Brewing Company, which makes the popular craft beer Fat Tire, is up for sale and could fetch more than $1 billion, according to reports.
PE firms that invested in the space in 2015 include Encore Consumer Capital, Fireman Capital Partners, Tenth Avenue Holdings and LNK Partners.
Private equity is attracted to craft beer because it promises phenomenal growth. For instance, Oskar Blues Brewery has averaged 52 percent growth per year since its inception, said Chad Melis, spokesman for the Longmont, Colorado-based brewer. Oskar Blues produced 192,000 barrels last year, up from 340 barrels of beer in 1999, Melis said.
In discussing why Constellation Brand bought Ballast Point, Chief Executive Officer Rob Sands told the Wall Street Journal: “We see the craft category continuing to grow double digits for the foreseeable future and take a significant share of the beer business over the next 10 years.”
The beer sector’s rapid-growth profile, plus high profit margins, are driving a thirst for craft beer companies, said Eric Roth, a managing director and head of the consumer and retail group at Lazard Middle Market. Private equity firms consider many different business models when they are looking to invest. Since craft brewers tend to be operationally less complicated, they are appealing to private equity, Roth said.
On the flip side, many entrepreneurs are entering the craft beer market, which can lead to an oversupply, Roth said. In fact, last year saw the number of active U.S. breweries top 4,000 for the first time since the 1870s, according to the Brewers Association.
“People are worried that too much capacity could lead to price wars,” Roth said.
Craft beer is part of a larger trend where consumers are willing to pay a little more for higher quality and a better experience, said a private equity executive who asked not to be named. “Once your taste buds taste craft beer, you really don’t want to go back,” the executive said. “It’s an affordable luxury.”
Increased competition has spurred some craft beer companies to sell to private equity. Entrepreneurs want the resources and firepower of PE to grow their businesses, the executive said.
Will private equity continue to invest in craft beer? The PE executive doesn’t think so. “There will not be quite the number of deals in 2016 [for PE] because a lot of the best brands have been spoken for,” the executive said.
Strategic buyers, however, will likely continue to make purchases. “There is no reason for them not to,” the source said.
For some, private equity’s interest in craft beer has raised concerns about independence, a hallmark of the craft brewing industry.
The Brewers Association defines a “craft brewer” as a company that is small, independent and traditional — with less than 25 percent of its ownership controlled by an alcoholic beverage industry member that isn’t itself a brewer. Small brewers are those that produce 6 million barrels of beer or less annually, said Julia Herz, the association’s Craft Beer Program Director.
Nearly all, or 99 percent, of the nation’s 4,100 breweries are small and independent craft brewers, Herz said. About 96 percent of them make less than 15,000 barrels of beer a year, she said.
Traditionally, most craft breweries are funded by friends and family. “Some brewers are funded by private equity, but there is no reporting system in place to track that,” Herz said. “We do not survey where they get their financing.”
The Brewers Association does not address ownership by non-beverage industry members like private equity firms, according Westword. Oscar Blues is still considered a small and independent craft brewer despite its sale of a stake to Fireman Capital, which is not registered as an alcoholic beverage industry member, Herz said. “Oscar Blues is still a small and independent craft brewer,” she said.
Action Item: Oskar Blues can be reached at 303-776-1914
SIDEBAR: Consuming passion
While private equity is increasingly interested in craft brewing, it is also more enthusiastic about consumer deals in general.
In 2015, there were 197 U.S. private equity announced consumer transactions, valued at $19.65 billion, according to data from Thomson Reuters. That’s more than three times the $4.56 billion reported for the prior year’s 212 U.S. PE consumer mergers.
The $19.65 billion includes such big deals as the $13.9 billion sale of Keurig Green Mountain to an investor group led by JAB Holding Company. The Keurig Green sale emerged as 2015’s largest U.S. PE consumer deal, Thomson Reuters said.
Other large consumer transactions include Verisk Analytics Inc’s acquisition of Wood Mackenzie from Hellman & Friedman LLC for $2.79 billion, Buyouts reported.
“We saw a very hot M&A market in consumer,” a second private equity executive said.
The biggest trend of 2015 involved strategics, who often traveled down market to buy smaller emerging brands, the second PE source said. Examples include The Hershey Company buying Krave Pure Foods Inc, maker of Krave jerky (Alliance Consumer Growth sold its minority stake). White Wave, in separate deals, bought Wallaby Yogurt for a reported $125 million and Vega, a powder and snack bar company, for $550 million. The Coca-Cola Company also invested $90 million in Suja, a juice maker.
In 2016, expect strategics to continue buying small brands, the second PE source said. “[Strategics] may be a bit more selective, but I think prices will continue to be full,” the exec said.
One of the more interesting deals of 2015 was the IPO of Amplify Snack Brands, parent of SkinnyPop Popcorn, the second PE source said. TA Associates, which owns Amplify, ran a dual-track process for the company and ended up taking Amplify public in August. The company priced at $18 a share but never traded above that number. In fact, Amplify’s stock closed on the NYSE at $9.73 a share on January 13, nearly 46 percent below its IPO price.
“Amplify can only succeed if they acquire more businesses and emerging brands,” the second PE executive said. “It will be very interesting to see what they go after and if they are able to integrate acquisitions successfully.” — Luisa Beltran
Photo: Tim Lappin pours beer to be sampled at the Brooklyn Brewery in the Brooklyn borough of New York, United States, March 9, 2015. REUTERS/Sara Hylton