Craft Brew Alliance’s long-term route to market in the U.S. — and perhaps its future ownership structure — became clearer this week after the publicly traded craft beer maker unveiled enhanced distribution and contract brewing agreements with its largest individual shareholder, Anheuser-Busch InBev.
ABI currently owns a 31.6 percent stake in the smaller CBA but this week’s agreement – which, it’s worth noting, was discussed jointly with members of the press by both CBA and Anheuser-Busch “High End” division executives – lays the groundwork for ABI to eventually purchase the entire CBA organization for as much as $24.50 per share. With more than 19 million shares outstanding, CBA could eventually be sold to A-B InBev — and presumably join its “High End” division — for more than $420 million.
But that future is by no means guaranteed and, if ABI did move to wholly acquire CBA, which in 2015 brewed more than 824,000 barrels, the purchase would almost certainly trigger an official Department of Justice review. Recall that in July, in an effort to move forward with its purchase of the world’s second-largest beer company, SABMiller, ABI agreed to future DOJ investigations involving any craft brewery acquisitions.
Nevertheless, what is guaranteed, at least for CBA, is continued marketplace access via the A-B distribution network; the opportunity to contract brew 300,000 barrels of beer and export opportunities via A-B InBev subsidiaries in places like Brazil, Mexico and Chile, among others.
So, here’s how the new commercial agreements will immediately help CBA’s bottom line in three significant ways:
Firstly, a renegotiated master distribution agreement will continue giving CBA access to A-B’s nationwide network of beer wholesalers in exchange for an existing $0.25 per case equivalent fee through 2028. Under a prior arrangement, which was last amended in 2011 and was subject to renewal in 2018, CBA’s fee for hitching a ride on A-B distributor trucks would have tripled to $0.75 per case equivalent. This new agreement locks in the fee at $0.25, providing CBA an estimated cost savings of about $6 million annually, according to CEO Andy Thomas.
Secondly, CBA will have the opportunity to brew upwards of 300,000 barrels of beer throughout A-B’s 12 U.S. breweries. That means CBA — which in recent years has worked to “rationalize” its brewery footprint by shifting production of its core brands from the Redhook breweries in Woodinville, Wash. and Portsmouth, N.H. to the Widmer Brothers brewery in Portland, Ore. – will slowly exit a separate contract brewing arrangement with City Brewery in Memphis, Tenn. and begin making beer with ABI instead. That transition will occur over the next 18 months, said Thomas, and save the company about $10 per barrel – or about $3 million annually once fully operationalized.
Thirdly, the new agreement with A-B InBev awards the world’s largest beer company the exclusive rights to distribute CBA brands in all countries not currently covered by CBA’s existing export partner, Craft Can Travel. In doing so, ABI will pay CBA an international royalty fee of between $30 and $40 per barrel, beginning in 2019. Until then, CBA will receive a “fixed international payment above and beyond the normal proceeds from their ABI-related international business of $3 million in 2016, $5 million in 2017 and $6 million in 2018.”
At least some of the proceeds from those incentive payments will be used to fuel the growth of CBA’s “Kona Plus” strategy, which prioritizes national sales of the Hawaiian-themed brand over those from Widmer, Redhook, Omission and its partner brands.
Still, the most interesting component of this week’s announcement was a more ambiguous “fourth pillar,” that contemplates the future relationship between both companies.
During a call with analysts and investors, Thomas made it clear that CBA would continue to operate independently in the short-term. A-B will maintain its 31.6 percent ownership and continue to hold two seats on an eight-person board.
But as both companies begin to consider the future development of the U.S. beer sector, they found it necessary to put in some “guardrails” in place and lay a “framework for options that could develop.”
So, to guarantee that ABI wouldn’t terminate the above-mentioned arrangements, CBA agreed to a set of qualifying offer terms should ABI move to purchase the company. The only way ABI is able to terminate the distribution and contract agreement, however, are if CBA rejects a qualifying offer.
Here’s how it works:
According to Thomas, a qualifying offer is “defined as an offer to acquire CBA for a minimum price of $22 per share during the first 12 months of the agreement, a minimum of $23.25 per share if the offer were made during the second 12 months of the agreement and a minimum of $24.50 per share if the offer were made during the third year of the agreement or after.”
It’s worth noting that the proverbial clock has already started ticking.
If CBA were to reject a qualifying offer or undergo a change in control involving someone other than A-B InBev prior to 2019, ABI would have the option to reconsider any of the new agreements.
More importantly, if A-B hasn’t made an offer by this time in 2019, it must pay CBA $20 million and it could not terminate any of the distribution or contract brewing agreements.
Of course, none of this guarantees a sale to A-B and the CBA board would obviously have a fiduciary responsibility to consider offers from other parties. But laying out these terms essentially gives CBA executives time to continue building value in its most profitable and most promising brand, Kona, depletions for which were up 18 percent year-to-date through June. It also simultaneously sets a floor price of at least $22 per share should ABI or any other buyer want to make an offer.
Wall Street has responded favorably to the news, with shares of BREW climbing from $14.46 prior to the announcement on Tuesday, to $19.90 after the closing bell on Friday. At one point on Friday, the stock priced climbed to $20.51, an all-time high.
“This deal is so CBA-friendly that we adjusted our price target to $22, in-line with the first qualifying offer,” Francesco Pellegrino, a food and beverage research analyst with Sidoti & Company LLC told Brewbound on Wednesday.
Pellegrino said he believes the “guardrails” set in place will allow the CBA to put the Kona brand into “super hyper drive,” and allow the company to gauge its short-term potential before having to make a buyout decision.
In a note to investors, Pellegrino raised Sidoti’s shipment growth rate forecasts for CBA brands in 2017 from 9 percent to 17 percent, attributing those revisions to accelerated growth for Kona and partner brands as a result of the new deal.
And it’s those partner brands that might actually stand to benefit the most as a result of the new agreement, Pellegrino added.
Indeed, it’s perhaps a less obvious benefit of the newly structured deal, but CBA has enhanced its ability to continue establishing strategic partnerships with prospective craft brands.
Similar to deals its already struck with Cisco Brewers or Appalachian Mountain Brewery, CBA can now guarantee distribution to smaller craft partners via the A-B network, through 2028, and offer those companies increased contract brewing capacity at its Portsmouth production facility.
“I think it enables us to think a little bit more boldly about our partnerships, be that in terms of the size and scale that we can consume or that we could stomach or in terms of whether we structure them as alt-props or whether or not we actually take a look at M&A activity,” Thomas said when asked during the call about the company’s ability to negotiate more deals via its emerging brands division.
So do all of these moves indicate that CBA executives are setting the company up for a sale, perhaps even as early as next year?
Pellegrino said he thinks a decision to sell the company would more likely happen “later rather than sooner,” arguing that A-B would want time to assess the long-term viability of the Kona brand.
But let’s not forget three separate but important events that could also point toward a possible 2019 buyout timeline.
- CBA has a contract brewing agreement with Pabst Brewing, which gives the later company an option to purchase the Redhook brewery in Woodinville, Wash. over a three-year time frame. It’s no secret that CBA wants to rid itself of that brewery location and the new deal for contract capacity with A-B coupled with investments into both the Widmer facility in Portland, Ore. and a brand new Kona brewery in Hawaii indicate that CBA will eventually look to sell the Woodinville property altogether.
- Andy Thomas’ current employment contract will expire at the end of 2018. If the plan were indeed to sell CBA to A-B InBev, or another interested buyer, Thomas’ current contact is slated to end on Dec. 31, 2018 and that could be part of the consideration process.
- In May, the CBA Board of Directors approved revised severance arrangements for each of the executive officers, should any be terminated after a change in control occurs. At the same time, they also awarded a number of restricted stock units (RSU) to five executive officers. Those are slated to vest in full on March 31, 2019.