Craft brewer Ballast Point sold for record-breaking USD 1 billion

Funny that. What started a decade ago as sort of a rebellion against “Big Beer” is itself becoming Big Business. Constellation Brands, the number three brewer in the U.S., said on 16 November 2015 that it will pay USD 1 billion for Californian craft brewer Ballast Point Brewing – a record sum for a U.S. craft brewer. San Diego-based Ballast Point, which was founded in 1996 by a small group of homebrewers, confirmed the sale one day after the conclusion of the San Diego Beer Week. Around the world the 10-figure sum commanded attention.

I don’t understand the surprise. May I remind readers that a profit multiple of 80 seems to be the going rate for craft brewers these days. When in April 2015 the Scottish BrewDog embarked on its fourth, and one-year long crowd-funder to raise GBP 25 million or USD 40 million (see my report “Money from the Masses” in BWI 4/2015), it valued itself at 80 times profit.

If over in the UK craft brewers can get away with such a valuation, why can’t Ballast Point?

It has since transpired that Constellation was in a bit of a rush to buy Ballast Point. The craft brewer had already filed regulatory paperwork to take the company to the stock market. So Constellation had to make Ballast Point an offer they could not refuse.

Ballast Point was ranked as the 31st largest U.S. craft brewer last year, with the brand Sculpin IPA accounting for 60 percent of its sales. Apart from Sculpin IPA it produces around 100 different styles of beer and distributes its beer to 34 states in the United States.

Probably from the regulatory paperwork, U.S. media found out that Ballast Point doubled its production and sales in the first half of this year, selling more than 118,831 barrels beer and generating USD 51.7 million in net revenue. It reported a first-half profit of USD 5.9 million on revenue of USD 357.66 a barrel. This is well above the craft-beer average of USD 270 a barrel, according to Townsend Ziebold, a Managing Partner at consultancy First Beverage Group, who works in craft-beer mergers and acquisitions.

In actual fact, the USD 1 billion sum translates into a multiple of nearly 10 times annual net revenue (Ballast Point is expected to reach sales of USD 115 million this year) and roughly 80 times annual profit, assuming Ballast Point’s profit is only USD 12 million for the full year.

The previous going rate for craft brewers was believed to be over USD 1,000 per barrel beer sold. If this figure had been applied to Ballast Point, they could have still commanded over USD 300 million or in excess of 20 times profits. But this is moot speculation as the next lot of craft brewers that will come on the market will take their heed and heart from Ballast Point’s record-breaking valuation.

This is the second time in recent months that a Big Brewer has bought a San Diego brewery. In September, Saint Archer was purchased by brewer MillerCoors for an undisclosed sum. Yet the two sales are markedly different. Saint Archer is smaller — it may produce 35,000 barrels of beer this year, as opposed to Ballast Point’s estimated 300,000 (350,000 hl). Moreover, the not-quite three-year-old Saint Archer brewery has not been a key player in San Diego beer, local media say.

Constellation, based in Victor, N.Y., started out as a wine business in the 1940s. It became the third-largest U.S. brewer in 2013 after acquiring the rights to Corona, Modelo Especial and other Mexican beer brands from AB-InBev during its takeover of Grupo Modelo. Constellation has more than 100 brands in its portfolio, including Swedish vodka Svedka, and California’s Robert Mondavi wines.

It has long been taken for granted that Constellation would eventually snap up a craft brewer. Craft beer has become one of the growth categories in a fairly stagnant U.S. beer market, with volumes rising to 14.2 million hl beer over the first six months of 2015, or a 16 percent increase, accounting for an 11 percent share of the market. There are currently some 3,700 craft brewers in all, with 1,750 more in the planning stage, says the Brewers Association. Also, Constellation’s rivals, AB-InBev and MillerCoors, have been doing this for a while: buying smaller craft beer brands with great potential and scaling sales by using their own superior marketing and distribution muscle. With this acquisition, Constellation hopes to strengthen its position in the high-end beer segment.

Still, in money terms, Constellation’s craft beer acquisition does not appear all that crafty compared to its previous beer deals. If you look at how efficiently Constellation has used roughly USD 4.5 billion of borrowings to break into the beer business and expand production capacity, Constellation’s management has undoubtedly overpaid for Ballast Point.

It was pointed out that, through the debt load that Constellation took on to buy the Mexican beers, it managed to raise its earnings per share from USD 2.04 in fiscal 2013 to a projected range of USD 4.73 to USD 4.93 for fiscal 2016. Even at the low end of the range, Constellation will have generated a return of approximately USD 0.60 per share for every USD 1 billion of debt by the end of the current fiscal 2016 year.

By contrast, the Ballast Point deal, which will likely be financed mostly with debt, will be earnings-neutral in 2016, and will add only USD 0.05 to USD 0.06 in earnings per share in 2017. That’s a drastically lower return for so much leverage, seasoned money people say.

However, in the long run, who will care that Constellation overpaid, if they can do for the Ballast Point portfolio what they have already done for Corona, the fifth-ranking beer brand in the United States? Between 2012 and 2014 they grew Corona’s sales by 8.3 percent to reach 9.1 million hl. Constellation’s total beer portfolio represented nearly 17 million hl in 2014, up from 14 million hl in 2012, according to estimates by Beer Marketers Insights.