Shareholder Lawsuit Alleges Breach of ‘Fiduciary Duties’ in Proposed Merger of CBA and Anheuser-Busch

A Craft Brew Alliance (CBA) shareholder has filed a lawsuit against the Portland, Oregon-based craft beer maker, its board of directors and Anheuser-Busch InBev alleging that the world’s largest beer manufacturer exercised its influence over the smaller company to sell “on unfair terms.”

“Anheuser-Busch exercised control over CBA through both its significant stock holdings and board positions and its control over the vast majority of CBA’s distribution and sales processes,” the lawsuit said.

After eschewing a buyout of the remaining shares of CBA stock at a price of $24.50 per share in August 2019, A-B agreed to acquire the company for $16.50 per share in November.

Plaintiff Tim Malloy alleges that CBA CEO Andy Thomas and the board of directors have breached “their fiduciary duties” with regard to the proposed merger with A-B, which Malloy alleges aided and abetted CBA. The lawsuit was filed in Oregon circuit court in Multnomah County on July 8.

In addition to CBA, A-B and Thomas, other defendants include CBA board members David Lord, Timothy Boyle, Marc Cramer, Paul Davis, Matthew Gilbertson, Kevin Kelly, Nickolas Mills and Jacqueline Woodward.

Malloy is seeking $107 million on behalf of shareholders, the amount the lawsuit alleges A-B saved on the acquisition of CBA by impeding sales of CBA products, thereby driving down the value of CBA stock (BREW).

In November, A-B agreed to acquire the 68.8% of CBA it did not already own for $16.50 per share. That 68.8% was equivalent to 13.4 million shares, according to the lawsuit, for a total acquisition price of $221.1 million. However, the November agreement came nearly three months after A-B declined to make a qualifying offer to purchase CBA for $24.50 per share, pursuant to a commercial arrangement the two companies struck in 2016. At that price, acquiring the 13.4 million shares of CBA would have cost A-B $328.3 million.

That agreement included a buyout option that stipulated A-B could acquire CBA for $22 per share by August 24, 2017, for $23.25 per share by August 24, 2018, or for $24.50 per share by August 23, 2019. If A-B declined to make an offer by the latter date, it had to pay CBA $20 million for holding the option open, which it did.

Under the commercial arrangement, CBA relies on A-B’s distribution network to sell its products, a setup that dates back to the 1990s, when Seattle-based Redhook Brewery and Portland, Oregon-based Widmer Brothers sold minority stakes to A-B for access to A-B’s wholesalers. Those two breweries merged in 2008 to form CBA, which now includes Kona, Omission Beer, Cisco Brewers, Square Mile Cider, Appalachian Mountain Brewery and Wynwood Brewing.

The lawsuit alleges that A-B “systematically and purposefully used its control over CBA’s distribution and sales processes to slow the distribution of CBA’s products, thereby artificially lowering the company’s results and stock price.

“Then, once the company’s stock price was artificially lowered through Anheuser-Busch’s intentional acts, Anheuser-Busch moved in for the kill, using its significant stockholdings and leverage over the company’s distribution and sales processes to disrupt CBA’s operations and prevent it from entertaining other acquisition offers, forcing the company into a sale on the cheap,” the lawsuit continued.

To decrease sales of CBA products, the lawsuit alleges that A-B gave its wholesalers “very firm direction” to prioritize sales of A-B products over CBA products and did not count CBA sales “toward achieving any key performance metrics,” an unnamed witness said in the lawsuit.

Although the lawsuit does not specify when this deprioritization began, it points to depletions (sales to retailers) trends for Kona, CBA’s best selling brand, and CBA’s total portfolio, which both declined after 2016 when the commercial arrangement went into effect.

Depletions of Kona, which CBA acquired in 2010, were increasing year-over-year (+13% in 2014, +16% in 2015, +17% in 2016), but those gains became steadily smaller (+10% in 2017, +8% in 2018, +4% in 2019). In Q2 2019, Kona overcame out of stock issues and its depletions increased 8%.

In May 2019, Boston-based Midwood Capital Management, which owned 2% of CBA’s shares, published a letter to CBA’s board of directors estimating that shares of Kona as a standalone brand would be valued between $21 and $26. Midwood compared the proposed price of $24.50 per share to that month’s merger between Dogfish Head Craft Brewery and the Boston Beer Company, which Midwood valued at $1,000 per barrel. A-B’s $24.50 per share price translated to $435 per barrel for all CBA brands, which Midwood called “a monumental discount in our minds.”

In the days that followed A-B’s decision not to make a qualifying offer last August, CBA’s share price declined from $12.96 on August 22, the day before the deadline, to $9.28 on September 5, when Thomas held an off-cycle conference call for investors and analysts to discuss A-B’s decision.

Over the fall of 2019, CBA and A-B continued to negotiate a share price; in September, A-B told CBA it thought the company was valued at $15 per share. Thomas deemed that “insufficient” and recommended $18 per share, according to the lawsuit.

“CBA had no choice but to negotiate with Anheuser-Busch, as it was virtually impossible to sell to anyone else in light of Anheuser-Busch’s stockholdings and control over its distributions and sales processes,” the lawsuit said.

The acquisition was announced in November, and CBA shareholders voted nearly unanimously to approve the merger in February. Now, the merger needs to clear Department of Justice regulatory approval. To do so, CBA announced plans last month to divest itself of Kona’s sales and operations in Hawaii, which it intends to sell to PV Brewing Partners, a partnership between former A-B president Dave Peacock and Overland Park, Kansas-based family office VantEdge Partners.

Requests for comment from Malloy’s attorney, CBA and A-B were unreturned as of press time.