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 and Molson Coors Brewing Co., is in the market for acquisitions, while winemaker Constellation Brands Inc. 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.
“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.
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.
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’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.
Constellation’s planned acquisition of Grupo Modelo SAB’s U.S. distribution and production arm may prompt it to begin buying craft brands, according to a report by San Francisco-based Demeter Group Investment Bank, which specializes in alcoholic beverages.
Constellation may follow a pattern it used to consolidate in wine, picking and choosing fast-growing, premium-priced market leaders popular with millenials within specific hot styles, like wheat beers and India pale ales, Demeter said.
Constellation Chief Executive Officer Rob Sands said the company is open to craft acquisitions and is considering introducing a brand of its own with celebrity chef Rick Bayless.
“It depends on the deal,” Sands said in an interview. “The craft segment is very fragmented and comprised of a lot of very small regional players so it depends on what it is. Some of that stuff could be too small and immaterial for us.”
Some craft founders may be persuaded to sell because they face daunting odds scaling up in a market so overwhelmingly dominated by mega-brewers, which have a lock on distribution. Case in point: While Boston Beer, the largest craft brewer, shipped almost 29 million cases in 2011, AB InBev shipped 538 million cases of Bud Light alone.
They’re “going to be smart enough and forward-looking enough to recognize some of the issues that are ultimately going to make competing in the industry more difficult,” Ziebold said. “They’re going to want to take money off the table.”
Larry Bell, whose Bell’s Brewery Inc. is among the country’s largest craft brewers, isn’t sure how many solicitation letters, packets and e-mails he gets. He’s trained the receptionist to screen them out. During a meeting a couple of months ago with a major bank, Bell was shown an internal document detailing how to structure deals with various brewers. Bell’s name was on the list.
A top executive from a mega-brewer that Bell declined to name once slipped a business card into Bell’s pocket at a beer summit in San Diego saying only, “You’re selling. I’m buying.” Bell wasn’t and didn’t.
“It takes so long to build equity in the brewery, once you’ve got it -- especially if your name is on it,” he said. “Do you really want to sell that to some private-equity people that are just there to make a bunch of money and flip it? What does that do for your legacy? That’s not why I spent 30 years building the business.”
Bell was working at a bakery in 1980 when he parlayed his knowledge of grain into brewing beer in his basement. He used a $200 birthday check from his mother to start his business three years later, brewing with a 15-gallon soup pot and garbage pails.
Now in 18 states and Puerto Rico, Bell’s has posted average annual growth rates of about 20 percent with ales such as Two Hearted and Oberon without opening a new market in four years.
Bell recently finished buying out 60 original investors to become a family-owned business, which he plans to pass on to his children. The last of those investors cashed a check for $590,000, having invested $2,000 almost three decades ago. Bell said if he makes any deal, it’s more likely to be as a buyer of a smaller brewery. He, too, believes there’ll eventually be sellers and that others will follow quickly.
“The first large craft brewer to go is probably going to get the most dollars per barrel,” Bell said. “If you are on the fence and you think you want to get your money, that may be the time while the getting’s good.”
Stone Brewing Co. founder Greg Koch, who refuses to ever discount his beers that include Arrogant Bastard Ale and Stone Ruination IPA, is unequivocal: “I will never sell out,” he said of his Escondido, California-based craft brewery, among the 20 largest in the U.S. “There’s no case to be made.”
Koch said banks are lining up to give money for expansion without an equity stake, so he doesn’t buy arguments from crafters who justify selling out because of the need for capital to expand production and distribution.
“I’m on the revolutionary side of the equation, on the fight-the-power side,” Koch said. “We have a responsibility as craft brewers, just like artisanal coffee roasters and cheese makers, to help shift the national consciousness into things that are real instead of this prefab manufactured industrialized notion of food and drink, which is killing us clearly.”
Did he mention, he’ll never sell?