Craft brewers and takeover speculations
When asked by Brauwelt International if the going rate for Australian craft breweries was really only five times EBITDA, financial advisers Deloitte replied that the reference to this low multiple during their presentation at the Craft Brewers Conference in Adelaide (26 July) “was purely for illustrative purposes and in no way reflects the valuation of Australian craft breweries generally.”
Craft brewers will be relieved to hear this, especially those who put themselves on the market.
Currently, two craft breweries are officially up for sale: Rocks brewery in Sydney and Vale brewery in South Australia.
The sale of Rocks was launched in June 2017. It includes a brewery, which was built in 2013, and a taproom. Not included are the Rocks brand, nor its leaseholds on two Sydney pubs. That the Rocks brand is not part of the parcel may not matter much to the prospective buyer as an estimated 50 percent of the 8,000 hl beer that Rocks currently produces is contract volume.
The owners are seeking AUD five million (USD 4 million), while insiders say the business should fetch no more than AUD two million to AUD four million, which translates into an enterprise value of three to six times forecasted EBITDA.
Obviously, Rocks’ valuation, whatever it will finally attract, is a far cry from the 20 times EBITDA that the craft brewer Little Creatures was valued at in 2012 when it was sold to Australia’s Big Brewer Lion, which itself is owned by Kirin.
Most likely, Vale Brewing, which is located in the McLaren region south of Adelaide, will sell for a higher multiple, although its volumes seem to have peaked and currently sit at 9,000 hl beer. Deloitte has been tasked to look for a buyer.
Another craft brewer which could throw itself on the market is Pirate Life. Established in Adelaide in 2014 by two young brewers Jack Cameron and Jared Proudfoot, who cut their teeth at BrewDog’s in Scotland, with the financial help of Jack’s father Michael Cameron, the brewery is slated to produce 30,000 hl beer this year as it looks to open a new plant in Port Adelaide in 2018, having outgrown its current facility.
Although all signs point towards the founders’ continuing interest in running the business, the elder Cameron let it be known when they started out that theirs was an exit strategy: building a successful craft beer company and then selling it to the highest bidder.
Apparently, establishing a profitable craft brewery is a huge challenge in Australia. Not only are craft brewers’ input costs far higher than the Big Brewers’ (AUD 90 per keg or three times the Big Brewers’), they also often have to sell beer at a lower price to bars (at packaged beer margins in fact) than the Big Brewers just to get in. It does not help that Australia’s excise is very high and unfairly geared towards keg beer as the pro rata excise rate on beer in bottles and cans is far higher.
All this proves to show that you don’t need artificial barriers of entry to ward off competition from smaller brewers. Australia’s geography – an island – easily lends itself to the creation of monopolies and duopolies, not just in the brewing industry, but also on the supply side and in retailing, which are much to the detriment of new entrants.
Adding to craft brewers’ woes, unique higher alcohol beer styles, which have made craft beer popular elsewhere, are not what Aussie drinkers want on the whole.
Mark Fethers, one of the founders of Rocks, believes the Australian beer market is still, for most part, seeking simple, unchallenging beers.
“Look at a lot of the craft beer guys doing well and they are not pushing the boundaries anymore,” said Mr Fethers. “It comes back to easy-drinking beer – still doing specialties that the craft beer world wants – but mainly easy-drinking beers.”
This was underlined during my visit to the Adelaide Beer and BBQ Festival, which was held from 28 to 30 July 2017. A large majority of the 60 or so craft breweries offered unchallenging pale ales, dark ales and IPAs.
You cannot fault them for their choice of styles, but it left me wondering how they will manage to differentiate themselves from each other and from the Big Brewers whose game has long been to offer easy-drinking beers?
Nonetheless, Australia’s Independent Brewers Association has targeted a 15 percent beer market share for the independents by 2025, up from four percent presently, which even the association’s chairman Ben Kooyman admits is ambitious. In fact, the eight-year target will require the current total of 420 independent brewers to achieve compound annual growth of 20.8 percent.
The Australian beer market is dominated by Lion (42 percent market share) and CUB (owned by AB-InBev and controlling 46 percent), followed by the privately-owned Coopers brewery (5 percent). The remaining three percent are shared by Asahi and the retailers’ private labels.
There is a big question mark hanging over these lofty targets. As Mr Fethers was quoted as saying in June 2017: “Competition is getting tighter and tighter and tighter. I honestly think there will be a lot of small breweries going arse up. If they have got no outlets or bar or front of house where they are selling their beer all the time, then they are going to struggle.”
