Craft brewers tap down resistance to Wall Street investors



00:00 EST, 19 August 2015

00:00 EST, 19 August 2015

By Lauren HirschNEW YORK, Aug 19 (Reuters) – Brooklyn Brewery, the craft
beer maker operating from New York City’s most populous borough,
resisted taking money from investment firms for almost three
decades, according to co-founder and Chairman Steve Hindy. Now
the brewer of Brooklyn Lager is having second thoughts.Hindy, who sold control of the brewery three years ago to
one of his early backers, the wealthy Ottaway family, said the
company needs capital to expand its business and meet rising
demand for its beer. So it’s considering selling some equity
with the help of investment banks, becoming one of more than a
dozen U.S. craft brewery companies thinking about accessing the
deep pockets of institutional investors.”We want to stay independent,” said Hindy, 66, a former
reporter who keeps a piece of shrapnel at his desk as a memento
from his time in Beirut, in an interview at his Brooklyn office.
“But we are looking at building a very large brewery in New York
City, which will probably cost in the neighborhood of $150
million.”The craft beer industry is booming, buoyed by deregulation
and the increased buying power of its largely millennial
customer base. The $19.6 billion U.S. craft beer market grew by
about 18 percent in barrel volume in 2014, according to the
Brewers Association. By contrast, the U.S. beer industry as a
whole saw volumes rise by only by 0.5 percent in 2014.”These are fascinating times in U.S. craft beer, and like
many of our brethren, we talk to many different people who are
interested in participating in this dynamic business,” said
Robin Ottaway, president of Brooklyn Brewery, who said the new
brewery will likely be in Staten Island.The list of those vying to participate in the business
includes private equity firms, family investors and large
alcohol brands. Some of these investors are hoping it will
include the public market as well.INVESTOR GOLD RUSHInvestors’ interest has already become apparent in some of
the prices paid for entry. When Oskar Blues Brewery, the
Longmont, Colorado-based maker of Dale’s Pale Ale, was sold to
an affiliate of investment firm Fireman Capital earlier this
year, it was valued at as much as 20 times its 12-month earnings
before interest, tax, depreciation and amortization (EBITDA).By comparison, beer conglomerates Anheuser-Busch InBev
SA and Heineken NV trade at 13.4 times and
12.5 times EBITDA over the last 12 months, respectively.”Anyone who does want to sell, should be selling right now,”
said Hindy, who retains common stock in Brooklyn Brewery.
“Valuations are out of this world. There are people swarming all
of us wanting to give us money. In a two-week period, I had 17
different private equity firms that called.”Brewers are seeking outside investment as the burgeoning
craft beer market heralds an expensive fight for shelf space. To
compete, brewers have to invest in new production facilities,
distribution systems and styles of beer. “A lot of craft brewers
are capacity constrained, selling every drop they can make,”
said Andy Goeler, CEO of craft for Anheuser-Busch InBev.Some of the craft brewers exploring selling part of
themselves, in private placements or initial public offerings,
include Lagunitas Brewing Company of Petaluma, California,
Ballast Point Brewing Company in San Diego and SweetWater
Brewing Company in Atlanta, according to sources who asked not
to be identified because these plans are confidential. Each of
them is estimated to be worth hundreds of millions of dollars.
Representatives for these companies declined to
comment.Still, these investments are not without risk, and it is not
clear what the marriage of institutional money and independent
brewer will bring. “The money guys make money and that’s a whole
different way of looking at the world,” said Hindy. “We make
beer and the money follows.”IMAGE RISKCraft beer is defined by the Brewers Association as beer
that comes from a company that produces fewer than 6 million
barrels a year. Hindy, whose Brooklyn Brewery shipped about
252,000 barrels last year, says the definition of craft beer is
in the glass of the drinker.Anheuser-Busch InBev, maker of Budweiser and Stella Artois,
has made a string of craft beer company acquisitions in the last
18 months that include Blue Point Brewing, Elysian Brewing and
10 Barrel Brewing. Constellation Brands, the distributor
of Corona Extra beer in the U.S., said this week that it was
creating a ventures arm to invest in new and distinctive
concepts in alcoholic beverages, which may include craft beer.While the craft brewers stand to benefit from the access to
equipment, raw materials and the bigger distribution network of
their larger peers, such deals also pose significant
reputational risk to their independent brands.When Anheuser-Busch InBev bought 10 Barrel Brewing last
year, for example, the deal triggered a social media backlash
that included threats of a boycott and angry Facebook posts.”Naturally there was a push back from the local community,”
Goeler said. Still, he said customers returned when it realized
the acquisition would not lead to changes in cost or quality.An Anheuser-Busch InBev spokesman declined to comment on 10
Barrel’s performance since its acquisition. A source that was
not authorized to publicly discuss financial details said 10
Barrel has seen revenue grow 20 percent since the acquisition.Private equity firms have also historically posed risks to
the image of craft brewers as community-oriented companies that
value their product above profit. Craft brewer owners have
sought to address these concerns by offering only minority
stakes, allowing founders to keep control of the companies.Sam Calagione, founder of Dogfish Head Craft Brewery in
Milton, Delaware, a craft brewer that is exploring selling a
minority stake, said in an interview that many private equity
firms will introduce themselves as potential minority investors
and then try to negotiate a deal structure that gives them
control or quickly takes the company public.”There is an initial position of only wanting a minority
investment, and within the first meeting they talk about a path
to majority control or an IPO,” Calagione said. He said he’s
also met some firms that were happy to remain minority
investors.GOING PUBLICAn IPO is seen by many craft brewing companies as less
dilutive to their brand. But companies have to reach a certain
size to float in the stock market, and some of them opt for a
private investment as a bridge to an IPO. Industry sources said
that a $500 million valuation is a rough threshold appropriate
for a listing.After U.S. President Jimmy Carter signed a law in 1978
legalizing the home production of beer, the craft brewing
industry saw a major wave of IPOs in the 1990s. The most
successful of them was Samuel Adams maker Boston Beer Co
, which now has a $3 billion market capitalization.Several others jumped on the IPO bandwagon but, by 2000,
nearly 200 craft breweries had gone out of business as their
beers could not keep up with the quality that consumers
expected. It was not until the rise of Millennials in the last
few years that the industry underwent a renaissance.Some craft brewer founders such as Hindy and Calagione
resist taking their companies public on concern that shareholder
pressure to meet quarterly earnings targets can erode their
creativity. Boston Beer adopted a dual-class share structure so
that founders could maintain control of the company.For craft brewers like Hindy, the biggest challenge to
getting bigger may be in retaining their identity.”Craft breweries have a soul, and I think the big money
coming into the industry is kind of a challenge to that soul,”
he said.

(Reporting by Lauren Hirsch in New York; Editing by Greg
Roumeliotis and John Pickering)

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