Will craft brewers succumb to the lure of Wall Street money?
The Brewers Association’s definition of a craft brewer stipulates that in terms of ownership less than 25 percent must be controlled by a Big Brewer. This implies that craft brewers could keep their clout as the better beer guys if they were to take in non-beer investors, right?
This reasoning must be behind the recent discussions among craft brewers that Wall Street’s money should not be rejected outright.
Media reported in August 2015 that Brooklyn Brewery is reconsidering its initial gut reaction against taking money from investment firms.
Brooklyn’s co-founder and Chairman Steve Hindy, 66, who sold control of the brewery three years ago to one of his early backers, the Ottaway family, said his company needs capital to expand its business and meet rising demand for its beer.
Mr Hindy told Reuters (19 August 2015) that Brooklyn wants to stay independent. But they are looking at building a brewery in New York City, which will probably cost an estimated USD 150 million. Now Brooklyn is investigating its options as to how to raise this sort of money.
For its expansion into Sweden and Norway, Brooklyn chose another path. It set up joint ventures with Danish brewer Carlsberg.
Investors’ interest in craft beer has already become apparent in some of the prices paid for entry. Beer Marketer’s Insights, a trade publication, recently said that the going rate for craft brewers is about USD 1000 per hl beer produced.
“Anyone who does want to sell should be selling right now,” Mr Hindy was quoted as saying. He added that “valuations are out of this world. There are people swarming over all of us wanting to give us money. In a two-week period, I had 17 different private equity firms that called.”
Brewers are seeking outside investment as the burgeoning craft beer market heralds an expensive fight for shelf space. To compete, brewers have to invest in new production facilities, distribution systems and styles of beer.
The Reuters article claims that some of the craft brewers exploring selling part of themselves, in private placements or initial public offerings, include Lagunitas Brewing Company of Petaluma, California, Ballast Point Brewing Company in San Diego and SweetWater Brewing Company in Atlanta. Each of them is estimated to be worth hundreds of millions of dollars.
Still, taking in outside money is not without risk, and it is not clear what the marriage of institutional money and independent brewer will bring. “The money guys make money and that’s a whole different way of looking at the world,” said Mr Hindy. “We make beer and the money follows.”
Sam Calagione, founder of Dogfish Head Craft Brewery in Milton, Delaware, another craft brewer that is exploring selling a minority stake, said in an interview that many private equity firms will introduce themselves as potential minority investors and then try to negotiate a deal structure that gives them control or quickly takes the company to the stock market (aka “going public”).
As Brauwelt International pointed out a few months ago, the fundamental problem with private equity money is that these investors will want to exit eventually and then the whole sales process starts all over again.
Going to the stock market is seen by many craft brewing companies as less dilutive to their brand. But companies have to reach a certain size to float on the stock market, and some of them opt for a private investment as a bridge to an IPO. Industry sources said that a USD 500 million valuation (or 500,000 hl output) is a rough threshold appropriate for a listing.
Some craft brewery founders such as Mr Hindy and Mr Calagione resist taking their companies public on concern that shareholder pressure to meet quarterly earnings targets can erode their creativity.
Ultimately, for craft brewers like Mr Hindy, the biggest challenge to getting bigger is in retaining their identity.
