SweetWater Brewing Co. Chief Executive Officer Freddy Bensch gets plenty of solicitations from potential acquirers.
One stands out: a handwritten note with a crisp $50 bill from a banker begging for a meeting. The greenback was so pristine and odd a gesture that Bensch wondered if it was real.
“We took that $50 bill over to the pub and spent it on beers and they accepted it,” said Bensch, who co-founded the maker of hoppy 420 Extra Pale Ale and chocolaty Exodus Porter with a college roommate. “We didn’t accept the meeting. We toasted him when we were buying beers with his 50.”
Bensch isn’t unique in his determination to resist over-the-top premiums from eager dealmakers. He and other craft entrepreneurs say private-equity firms and large brewers can’t be trusted to preserve a culture that values employees, local communities and good beer over maximum profit. What’s more, brewers can get easy financing to expand production and continue to outpace the industry’s volume sales growth by 15 times.
Still, a scarcity of sellers amid demand by private equity and major brewers could force open the tap within the next two years, dealmakers and brewers agree. MillerCoors, owned by SABMiller Plc (SAB) and Molson Coors Brewing Co. (TAP), is in the market for acquisitions, while winemaker Constellation Brands Inc. (STZ) may also also acquire craft brewers.
A sale or two among the country’s top craft brewers may prompt others to rush in to avoid missing the money train, said Townsend Ziebold, a managing partner at First Beverage Group, a Los Angeles-based investment banker specializing in the beverage industry.
Good Times
“Times are good and none of them are really feeling any operation headwinds at the moment,” Ziebold said. “We think that’s going to change.”
There hasn’t been much consolidation in the craft segment since the financial crisis. In 2008, Stamford, Connecticut-based hedge fund Basso Capital Management LP, then majority owner of South Burlington, Vermont-based Magic Hat, paid about $25 million for Seattle-based Pyramid Breweries Inc. KPS Capital Partners later bought the rolled-up brewers before selling them and others they controlled to a Costa Rican company last year for $388 million.
Woodinville, Washington-based Redhook Ale Brewery Inc. bought Portland-based Widmer Brothers Brewing Co. in 2008 to form the Craft Brewers Alliance Inc. They were both a third owned by Anheuser-Busch Cos. CBA then snapped up Hawaii-based Kona Brewing in 2010. In St. Louis last year, private equity firm Sage Capital LLC bought a majority stake in local brewer Schlafly Beer.
Sales Surge
Craft’s growth is driving the interest. The segment’s sales surged 15 percent last year by volume as the U.S. beer industry overall struggled to post a 0.9 percent increase, according to Boulder, Colorado-based trade group Brewers Association. The demand has created pricing power as craft sales jumped 17 percent in dollar terms. The segment is still small, accounting for about 10 percent of the almost $100 billion market by dollar sales. Craft’s volume share last year jumped to 6.5 percent from 5.7 percent.
To meet demand, craft brewers have rushed to build new capacity, driving the total number of breweries last year to the highest since the 1880s. Brewery permits spiked 19 percent to 2,751, according to data compiled by Bloomberg. The biggest increases came in California and Texas as all but seven states gained breweries. New Jersey was among four states that lost breweries.
Acquisition Mission
Mega-brewers will keep pressuring craft brewers to sell. MillerCoors’s Tenth & Blake Beer Co. division was created in part to develop and acquire craft beers and owns a minority stake in Georgia’s Terrapin Beer Co. The division’s chief Tom Cardella says interest cuts both ways. At least 20 craft brewers approached him to discuss their businesses at a recent conference. Molson Coors CEO Peter Swinburn shrugged off the lack of craft sellers.
“Tenth & Blake is by far the biggest craft operation in the United States, so we don’t feel the need to buy anyone,” Swinburn said today in an interview. “That doesn’t mean we wouldn’t do it. It’s not a strategic agenda for us, but if the opportunity came we’d look at anything as we would any other brand.”
Molson Coors shares fell as much as 4.2 percent today in New York after first-quarter profit trailed analysts’ estimates. The brewer’s U.S. sales to retailers, a key measure of consumer demand, slid 3.3 percent. Anheuser-Busch InBev NV (ABI)’s first-quarter U.S. sales to retailers fell 4.1 percent, adjusted for selling days. MillerCoors has struggled with declining market share of Miller Lite, as has AB InBev with Bud Light.
