A minority activist investor in Craft Brew Alliance (NASDAQ: BREW) has sent a letter to the brewery’s board of directors urging the company to consider a sale.
David Cohen, the founder of Boston-based private investment fund Midwood Capital Management LLC — which owns about 2 percent of CBA’s outstanding shares and currently has about $70 million under management across 20 different small cap-stocks — believes CBA “must seek a sale to maximize shareholder value.”
Cohen’s letter was issued about three months before Anheuser-Busch, which owns a 31.3 percent stake in CBA, must make a qualified offer to buy the company for $24.50 per share or pay a $20 million fee as part of a 2016 commercial agreement.
Citing last week’s $300 million sale of Dogfish Head Craft Brewery to Boston Beer Company as a proxy, Cohen argued that the “intrinsic value of Kona alone – excluding all other CBA brands – should approach the current qualifying offer threshold of $24.50 per share.”
His reasoning? If Dogfish Head sold for $1,000 per barrel, and Kona is projected to make 505,000 barrels in 2019, the equity value of the Hawaiian-themed brand, factoring in total debt, ranges somewhere between $409 million and $510 million.
The mid-range standalone Kona valuation, Cohen argued, would represent a 53 percent premium to CBA’s current market price.
Over the last year, CBA stock has traded between $13.76 and $20.90 and is currently listed at $15.33.
“CBA lacks the margin structure and scale of its peers to grow sales, profits, and cash flow consistently,” Cohen wrote. “Absent an ability to consistently deliver this fundamental financial performance, the gap between price and intrinsic value will not close in the public market. Shareholder value will then only be maximized through a transaction in which another entity determines what CBA is worth.”
In other words, Cohen wants CBA board members to lean on A-B executives and encourage an acquisition. If A-B makes an offer, CBA’s board should “absolutely accept it,” he wrote.
And if A-B is uninterested, Cohen believes the company should identify another buyer in order to continue operating successfully in a crowded craft beer environment while providing a return on shareholders’ investments.
“With the combined effects of the trends in [the] craft beer industry and CBA’s inherent challenges to grow revenue, profitability and cash flow, we strongly believe that the company must seek a sale to maximize shareholder value,” he wrote.
Speaking to Brewbound, Cohen called Kona the “crown jewel” of CBA’s portfolio and said the challenges of being an independent publicly traded beer company, coupled with the recent transaction between Boston Beer and Dogfish Head, prompted him to pen the note.
Meanwhile, CBA spokeswoman Jenny McLean said CBA “maintains an ongoing dialogue with all shareholders,” and “values their input.”
She also noted CBA chief Andy Thomas’ remarks during the company’s most recent earnings call, saying the brewery would consider “a host of strategic alternatives” if A-B didn’t make a qualified offer.
“CBA’s shareholders can be assured that CBA is well-protected — with the security that existing ABI agreements would continue at CBA’s unilateral election for up to another seven years,” he said last week.
It’s worth noting that CBA just recorded a net income loss of $7.3 million in the first quarter of the year, primarily driven by the previously disclosed $4.7 million charge that CBA elected to record as a result of settling a years-long class-action lawsuit over alleged “false and deceptive advertising” of its Kona Brewing beer brand.
In 2018, the company’s total net income was about $4.1 million.
In the event that A-B does not make a qualifying offer, or restructure its commercial agreement with CBA, a $20 million fee would undoubtedly help improve CBA’s bottom line in 2019.
Cohen’s full letter to CBA’s board can be found in this press release.