Constellation Brands Makes a $1 Billion Bet on Craft Beer


It took some time, but Constellation Brands (NYSE: STZ) has officially entered the craft beer business, today announcing the $1 billion acquisition of San Diego’s Ballast Point Brewing & Spirits.

Based in Victor, N.Y., Constellation Brands — a cross-category alcoholic beverage company that produces and markets popular brands like Corona Extra, Robert Mondavi Wines and Svedka Vodka — will finance the purchase of Ballast Point with a combination of cash and debt, it said in a statement. The deal is expected to close this year.

It’s a blockbuster transaction — the largest ever in craft — and represents an astonishing $3,500 per barrel multiple, as Ballast Point is expected to produce 290,000 barrels in 2015.

From a cash perspective, it’s also the most any company has shelled out for a craft brewery to date. Heineken paid upwards of $500 million this year for half of Lagunitas Brewing, another California-based craft brewery that will produce almost three times as much liquid as Ballast Point in 2015.

Propelled by $14.99 six-packs of its popular Sculpin IPA, Ballast Point will generate upwards of $115 million in revenue in 2015, according to a press statement, making today’s transaction about an 8.7X multiple of annual sales.

Despite the hefty price tag, initial reactions from the financial community appear to be favorable — shares of Constellation traded up 2.3 percent, to $135.26, at the close.

“We are encouraged by STZ’s decision to enter into the craft beer space, which should complement its best in class portfolio of imported beers, including Corona and Modelo Especial,” wrote Vivien Azer, an alcoholic beverage focused analyst with Cowen & Company. “STZ certainly looks to have picked a top brewer with robust growth potential in Ballast Point.”

Ballast Point has grown sales more than 100 percent in 2015 and “delivered gross margin of 51.7 percent,” Azer wrote.

A Patient Buyer


For years Constellation watched as both domestic and international competitors bought into a fast-growing craft segment, one that research firm Mintel expects to grow by 22 percent, to $24 billion, in 2015.

Many routinely questioned why the country’s third largest beer producer had yet to purchase a craft brewery, especially as rival Anheuser-Busch bought brands like Goose Island, Blue Point, 10 Barrel, Elysian, and Golden Road.

If you follow the timeline all the way back to 2012, you’ll notice Constellation’s interest in the craft segment begin to take shape. In November of that year, CEO Rob Sands told a group of executives attending the Beer Marketers Insights Seminar, held annually in New York City, that his company saw “a lot of opportunity” in the space.

Six months later, and following Constellation’s full acquisition of the Grupo Modelo rights in the U.S., Jeff Menashe, the CEO of Demeter Group, a San Francisco-based investment bank, assembled a presentation about Constellation titled “Why Craft Beer Is Next.” In it, Menashe argued that Constellation would eventually make a craft acquisition, noting that a craft purchase would complement the company’s “import-centric” portfolio.

Despite a flurry of craft merger & acquisition activity over the next two years, Constellation remained quiet. It watched as Duvel Moortgat acquired Boulevard Brewing and Firestone Walker. It saw Heineken enter the space with a 50 percent purchase of Lagunitas and it patiently stood by as MillerCoors, the second largest beer producer, acquired San Diego craft beer maker Saint Archer.

But Constellation could afford to sit on the sidelines for two big reasons: Corona Extra and Modelo Especial, the fifth and seventh largest beer brands in the U.S., respectively, are growing at a double-digit clip according to market research firm IRI Worldwide.

“Our hair was never on fire to make an acquisition,” Mike McGrew, Constellation’s senior director of communications told Brewbound. “Because of the strong performance of our core business, we had the luxury of taking our time and aligning with a partner that was a great fit for us.”

But as word began to leak that Ballast Point was considering a public offering, even before the company officially filed its S-1 form with the U.S Securities and Exchange Commission, Constellation saw an opportunity to finally make a move.

“We had to figure out a way of playing in craft,” McGrew told Brewbound.

So Constellation executives headed west, to California, a rapidly evolving craft marketplace where nearly every major beer company now has a beachhead (As noted aboveA-B owns Golden Road; MillerCoors owns Saint Archer; Heineken owns 50 percent of Lagunitas; Duvel Moortgat owns Firestone Walker and Boston Beer owns Angel City).

Southern California Synergies, Spirits Trademark a Factor


Still, Constellation had some “big questions” when it initiated talks with Ballast Point, according to McGrew.

“We quickly began to see the passion and commitment that permeates throughout their entire organization,” he said.

According to Earl Kight, the smaller brewery’s chief commercial officer, Constellation viewed Ballast Point as a “crown jewel.”

“We have brands that play in the high-end, which is what they do in other categories,” he said. “They have a crazy entrepreneurial spirit and, like Ballast Point, a passion for alcoholic beverages.”

That passion, coupled with Ballast Point’s current growth trajectory and a brand that “transcends geographies,” McGrew said, justified the $1 billion payday.

“We think there is huge potential for continued growth,” he said.

Not surprisingly, a $1 billion check was the “best offer” Ballast Point received, founder Jack White Jr. told Brewbound. The company turned down a number of lucrative deals with other potential partners, he said. Ballast Point also walked away from an IPO that White believes could have had “more upside” — the brewery was planning to raise more than $172 million via the public sale of 10 — 16 percent of company shares.

“Ultimately, we felt like a deal with Constellation would allow us to do what we know how to do best and let them deal with the Wall Street issues,” White said. “There was a lot of work that went into the IPO and that was a sign of all the work we would have been focused on as a public company going forward.”

Constellation, meanwhile, got one of the hottest craft breweries in the U.S. and a brand with a somewhat complementary distribution footprint — about 50 percent of Ballast Point’s wholesalers also sell Constellation, McGrew estimates. In key markets like San Diego and L.A., both companies work with powerhouse distributor Reyes Beverage Group, for instance.


It also bought access to the Ballast Point Spirits trademark, a potentially lucrative component of the deal and something McGrew said would “absolutely be a point of emphasis going forward.”

Constellation will not, however, take ownership of Ballast Point’s individual spirit brands like Fugu Vodka and Devil’s Share Whiskey. The rights to those properties have been relinquished and will be independently owned by White and chief operating officer Yuseff Cherney. White and Cherney plan to establish and co-own a new, yet-to-be-named distillery, the equipment for which is currently housed inside one of the company’s four brewery locations.

The Future

Ballast Point will continue to “operate as a stand alone company,” Kight said.

“They are going to continue doing the great things that they have been for years,” McGrew added. “Our overarching goal, as a beer business, is to be a strong leader in the high-end segment of the U.S. beer market. Job number one has been, and will continue to be, to maximize the growth within our existing portfolio and to execute the transaction with Ballast Point.”

For his part, White said a deal with Constellation was the “best decision for the long-term success of Ballast Point.”

“Life can be short and you never know how things will go in future generations,” he said. “There are no plans to change the people or the culture. We have a commitment to quality, and they know that. We are going to continue bringing the best beers we can to market.”