The bizarre story of the Pabst Brewing Company
Already in November 2009, Pabst’s owner, the Kalmanovitz Charitable Foundation, based in California, hired Bank of America Merrill Lynch to find a buyer willing to pay around USD 300 million.
According to media reports, the sale effort is apparently the result of a deadline imposed by the Internal Revenue Service (IRS), aka the taxman. U.S. federal tax laws do not allow charitable foundations to own for-profit companies.
For almost 20 years Pabst has been operating as a legal anomaly, despite the IRS’s best effort to stop it. The IRS once even drew the line and gave the foundation until 2005 to sell Pabst. However, that deadline was extended until June 2010 as a buyer couldn’t be found.
Pabst and its predecessor company, Best Brewing Co., had been a Milwaukee mainstay for more than a century when it was acquired in 1985 by Paul Kalmanovitz. He bought other declining mid-tier breweries, including Pearl and Falstaff, that were losing market share to Anheuser-Busch and Miller Brewing. Mr Kalmanovitz died in 1987 and left his fortune to his foundation.
When Pabst closed its Milwaukee brewery in 1996, it transferred production to Miller Brewing, now known as MillerCoors. For Miller, doing contract brewing for Pabst was a lucrative deal. In 1999 all of Pabst’s brands amounted to over 15 million hl. That volume has since declined to 7 million hl (2008) according to Beer Marketer’s Insights.
This decline was quite intentional. One, Pabst had to maximise profits for the Kalmanovitz Charitable Foundation. Two, because of the unsolved issue with the IRS Pabst could not really craft expensive marketing strategies. What would have been the point if, in the end, all went to the taxman?
Whether Pabst will find a buyer is an open question. Beer Marketer’s Insights argues that USD 300 million is a lot of money for such a liability which is what Pabst is.
According to the rumour mill, there seems to be only one buyer for Pabst and that is the private equity firm KPS Capital Partners. In 2009, KPS bought the U.S. business of Canadian brewer Labatt and the High Falls Brewing Company, forming North American Breweries. High Falls Brewing, the maker of the Genesee and Dundee beer brands, and Labatt USA, an arm of the world’s largest brewer AB-InBev, are both based in upstate New York. In order to take over Anheuser-Busch, InBev had been forced by the U.S. competition watchdogs to sell Labatt USA.
Beer Marketer’s Insights claims that KPS paid down the debt incurred in the Labatt USA purchase within a few months. KPS paid less than USD 60 million for Labatt USA because AB-InBev had to sell. The originally rumoured asking price had been USD 100 million.
However, Pabst being sold to KPS may just be idle speculation. Beer Marketer’s Insights alleges to know that the IRS may eventually relent and give Pabst another extension.
Well, who says that the brewing industry is a dull place?
